The S&P 500 reached a new record high on October 18, following six consecutive weeks of upward movement. Overall, the S&P 500 has gained 23% year to date, notching 47 record highs. The Wall Street index last week registered a record high of 5,882.
India’s Nifty 50 and Japan’s Nikkei 225 indices are up by 14%, while China’s Shanghai Composite Index has gained 10% so far in 2024.
The euphoria in US stocks comes from the optimism over artificial intelligence stocks, impending cuts in interest rates, the robust US economy and the economic data from China.
Atul Singh, MD and CEO, of LGT Wealth India in an interview with Financial Express Online discusses various aspects of global markets and how investors should position themselves as big global events take shape.
What major changes are happening in China and Japan that global investors need to be aware of?
In China, a broad stimulus package was introduced in September 2024 to address the country’s slowing economy. Key measures include the issuance of ultra-long special government bonds, reductions in the reserve requirement ratio, and interest rate cuts aimed at stabilising the real estate market, boosting household consumption, and promoting long-term equity investment.
While these actions are expected to provide modest short-term support to equities and restore some investor confidence, the long-term recovery still hinges on further fiscal stimulus and effective policy execution.
China’s central bank has also introduced structural tools, such as refinancing via stock repurchase and swap facilities, to support capital markets by increasing liquidity and stabilising the stock market.
One of the most significant focus areas remains China’s real estate sector, where the government has relaxed policies in core cities to encourage property sales and stabilise market conditions. However, there are risks associated with weaker-than-expected policy implementation, which could dampen the overall impact of these measures.
Meanwhile, Japan has experienced a boost in its equity markets, driven by a weakening yen. However, Japan’s newly appointed finance minister has raised concerns about the adverse effects of sudden currency fluctuations on businesses and households, signalling the need for careful monitoring of exchange rate policies.
Despite the yen’s depreciation, the broader Japanese market remains volatile. Bank shares have also risen as Japan’s 10-year bond yield increased, reflecting optimism in the financial sector.
In summary, both China and Japan are navigating unique economic challenges. China’s recovery efforts are primarily dependent on further policy execution and potential fiscal stimulus, while currency movements and macroeconomic factors are influencing Japan’s equity market, with volatility likely to persist in the short term.
S&P 500 has a decent run of nearly 22% YTD. How do you see the US Fed future rate cuts and US elections impacting stock market returns?
Historically, rate cuts by the Fed have been positive for equity markets, as stocks typically rise in anticipation of and during the rate cut cycle. Past rate cut cycles show that the S&P 500 has responded favourably, as lower borrowing costs tend to improve corporate earnings and lift overall market sentiment. This trend will likely continue as rate cuts are expected to create a more favourable liquidity environment supporting stocks.
The Fed’s focus on achieving a “soft landing” for the economy—controlling inflation without triggering a recession—could help sustain market optimism.
As inflation moderates and the economy stabilises, investor confidence in the growth potential of U.S. equities is expected to remain strong. The outlook suggests that rate cuts will soften bond yields, making equities more attractive relative to fixed-income investments and encouraging more capital to flow into the stock market.
However, the upcoming U.S. elections introduce a layer of uncertainty. Political outcomes could lead to shifts in government policies, especially in sectors sensitive to regulatory changes. This could affect investor sentiment and create short-term volatility in the markets.
While rate cuts may provide support to equities, election-related uncertainty could lead to market swings, particularly in the months leading up to the vote.
In summary, while the Fed’s potential rate cuts will likely be a tailwind for the stock market, the U.S. elections could introduce short-term volatility. Investors should be prepared for a mix of opportunities and risks as these factors unfold.
How are you adjusting your investment strategies in response to the recent geo-political tensions especially arising in the Middle East?
During periods of heightened uncertainty, a key focus is strengthening risk management by ensuring that portfolios are well-diversified across various asset classes and industries. This diversification helps reduce the potential negative impact of regional tensions on overall returns.
While geopolitical risks can lead to increased market volatility, they also create tactical opportunities, particularly in defensive sectors. The industry tends to benefit from the dynamics brought about by geopolitical shifts, offering potential upside even in uncertain times.
Additionally, increasing exposure to safe-haven assets such as gold or government bonds can provide stability to the portfolio as markets react to geopolitical developments.
The key is finding the right balance between risk exposure and defensive positioning. By maintaining a flexible and diversified portfolio, investors can better navigate the volatility that often accompanies geopolitical events while also remaining poised to benefit when markets stabilise. It’s important to stay invested because, historically, once geopolitical risks subside and market sentiment shifts to a more “risk-on” environment, portfolio returns have typically been favourable.
What are your expectations for the US and global markets over the next 6 to 12 months, and which sectors or regions do you believe hold the most potential?
Historically, the impact of elections on market performance has been temporary. While markets often react to election outcomes, the winning party or candidate has little bearing on long-term returns.
However, upcoming Federal Reserve rate cuts and related rhetoric will likely shape sentiment in Q4. Rate cuts have typically supported equity markets, particularly when not accompanied by a recession. Large caps often lead to small caps, and high-quality, low-beta stocks tend to outperform in the year following the onset of rate cuts.
As the economy approaches recovery mode, cyclical sectors become more attractive. Geopolitical tensions, particularly the conflicts in Ukraine and the Middle East, present risks, especially given these regions’ importance to global petroleum production. A potential escalation could lead to higher oil prices, affecting global markets.
Comparisons have been drawn to 1995 when strong earnings growth signalled that recession fears were overstated. During that period, emerging market equities and Indian stocks saw higher returns. Despite slightly elevated valuations this time, Indian stocks offer a favourable macroeconomic outlook, attracting foreign inflows.
Several factors will influence global market trajectories, including Federal Reserve policy, geopolitical tensions, and macroeconomic trends. Corporate earnings will also play a critical role, with companies that manage rising labour costs and economic uncertainty while maintaining profitability likely to reward investors. A focus on sectors with pricing power will be essential.
While growth outside the U.S. may be slower, particularly in Europe, due to high inflation and energy challenges, regions like Asia—especially India and Southeast Asia—are expected to outperform due to favourable demographics and growth in sectors such as technology and infrastructure.
Meanwhile, China’s market remains at a crossroads. Geopolitical risks could introduce inflationary pressures, influencing global oil prices and supply chains. This environment may hurt sectors reliant on international trade and manufacturing but could benefit commodities and defence stocks.
Disclaimer: Views, recommendations, and opinions expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Readers are advised to consult qualified financial advisors before making any investment decision. Reproducing this content without permission is prohibited.