Exploring Global Equities in 2024

In Brief

We believe 2024 offers a promising outlook for global small cap stocks, driven by a combination of favorable monetary policies, prospects for increased merger and acquisition activity, and attractive valuation comparisons versus large cap stocks.
The positive turn in the semiconductor cycle bodes well for international stock markets and semiconductor stocks, with increasing demand and strong performance indicating a brighter future for the industry.
Finally, we believe Japanese equities present a particular opportunity, as the nation’s inflation and corporate pricing power dynamics are at a historical inflection point, while broad valuation metrics suggest room for improvement.

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Global equity and bond markets experienced a robust rally into the end of December 2023, driven by an improving disinflationary trend. In the United States, the yield on the 10-year Treasury note, which peaked at around 5% in mid-October, fell by over 1% by year-end (based on Bloomberg data), setting the stage for a significant rally in risk assets. For equities, this upswing was led by the Information Technology sector, interest-rate-sensitive sectors like Real Estate and Utilities, and small cap stocks. Bull markets have formed in the United States, parts of Europe, and Japan, indicating a strong market recovery in local currency terms.

As 2024 begins, there's growing optimism for a resurgence in global small cap stocks. In 2023, these stocks underperformed compared to their large cap counterparts, creating a significant valuation gap. The convergence of favorable factors, including potential changes in global central bank policies, suggests a bright future for small caps in 2024. Interest-rate cuts in response to easing inflation could lower borrowing costs for small cap companies, encouraging growth. Additionally, the potential for increased merger and acquisition activity is high, as lower funding costs could drive larger companies to acquire high-growth small cap firms.

The semiconductor industry also shows signs of recovery, which is particularly beneficial for non-U.S. companies. After a challenging 2023, marked by inventory adjustments and reduced consumer electronics demand, 2024 promises a rebound, especially for north Asian firms central to the personal computer (PC) and smartphone supply chains. Factors like chip restocking, a revival in electronics markets, and sustained demand for AI chips fuel this optimism. Chipmakers with sufficient scale and a global footprint are well-positioned to benefit from these trends, in our view, thanks to their investment in research and specialized manufacturing.

Finally, we remain excited about the scope for change in Japan. Following years of deflation/low inflation, Japan is experiencing its strongest bout of inflation in 30 years. Rising wages and consumer prices, coupled with a significantly weaker yen, provide hope that Japan can change its nominal growth rate. In addition, over 40% of the companies listed in the benchmark Japanese index, the TOPIX 500, were trading below book value versus less than 5% in the U.S. benchmark, the S&P 500^® index (data from Tokyo Stock Exchange and SMBC Nikko, as of September 30, 2023). Many of these companies have been asked by the Tokyo Stock Exchange to share their plans to raise profitability and returns. Another potential tailwind is that many Japanese companies continue to hoard cash, with net cash positions on their balance sheets, and Japanese households, who hold 50% of their financial assets in cash and equivalents, have not yet moved out of cash into stocks and bonds. (See Figure 1.)

Figure 1. Plenty of Dry Powder: High Levels of Cash in Japan Could Be Deployed Elsewhere in 2024

Source: Bank of Japan, SMBC Nikko. Data as of March 31, 2023 (latest available). For illustrative purposes only.

Meanwhile, disinflation in other parts of the world has driven investors to begin reallocating into risk assets, and we believe Japan will follow. While a high government debt-to-gross domestic product ratio, and an aging and shrinking population, highlight a few of the current challenges, we believe that if current trends persist, Japan has significant potential for a long period of outperformance.

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About the Contributors

Vincent J. McBride

Partner, Portfolio Manager

Ryan C. Howard, CFA

Portfolio Manager

Yuriy Minchuk, CFA

Investment Strategist

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Glossary & Index Definitions

Price-to-Earnings Ratio: Stock analysts calculate a price-to-earnings ratio by dividing a stock's current price by its earnings per share on a trailing 12-month basis. A forward price-to-earnings ratio is calculated by dividing a stock's current price by estimated future earnings per share.

The price-to-book value ratio considers how a stock is priced relative to the book value of its assets. If the ratio is under 1.0, then the market is thought to be underpricing the stock since the accounting value of its assets, if sold, would be greater than the market price of the shares.

The S&P 500^® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

The TOPIX 500 Index represents the 500 largest stocks by free-float-adjusted market capitalization in the broader TOPIX (Tokyo Stock Price Index), which is calculated and published by the Tokyo Stock Exchange, Inc.

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