Over the past six months, the global stock market has rallied, reflecting economic growth across all major regions. With the stock market now at more reasonable valuations, portfolio managers need to be more discerning in identifying potential winners and avoiding losers. This review will delve into the year-to-date investment performance across major economies, including the United States, Europe, China, India, and Indonesia. We will provide a comprehensive overview of market trends and assess where the next potential stock market growth may occur.
The Developed World - US, EU and Japan
At the start of the year, the Japanese stock market appeared unstoppable, continuing its historical run fueled by a weakening yen and proactive corporate actions. However, the rally lost momentum as the US maintained its interest rates, raising concerns among foreign investors that the yen's depreciation might offset gains in equity prices, making Japanese market valuations more expensive.
The US stock market maintained its leading position among major economies, supported by steady job numbers and economic growth in a moderate interest rate environment. The recent Federal Reserve meeting lowered expectations for future rate cuts. While any interest rate cuts would create a positive environment for the stock market, a stable and moderate interest rate will likely continue to drive a slower but potentially more sustainable rally.
Anticipation of the European Central Bank's interest rate cuts, which materialized in June, helped European equities rally and catch up with other markets. Inflation has decreased to 2% following the hyperinflation years of 2022-2023, sparked by the Russian-Ukrainian war. Although the European economy remains in a state of flux as EU governments pursue unpopular economic reforms to enhance competitiveness, the lowered interest rates are expected to decrease the euro's value. This will narrow the gap between the yen and the Chinese yuan, which have devalued more rapidly compared to the euro.
BRIC - Brazil, Russia, India, China
At the start of the year, the Chinese stock market lagged behind the rest of the global equity markets but gained momentum when the Chinese government announced a massive 2 trillion yuan package in February to buy shares of state-owned enterprises. This sparked a rally in the China and Hong Kong stock markets. However, the rally fizzled as bad news from the property sector eroded investor confidence. Despite this, the stimulus rejuvenated Chinese equities, with more analysts adopting a positive outlook. History has shown that short-term injections can stabilize the market and buy time for fundamental improvements. More data is needed for a sustained rally in the Chinese equity market.
The Indian stock market experienced steady growth until the national election. The market declined when news broke that the Narendra Modi government lost its parliamentary majority and would need to seek alliances with other political parties to enact policies. The Modi government had enacted significant reforms thanks to its parliamentary majority, and the loss of this majority cast doubt on the continuation of these reforms. However, strong economic data from India reversed the decline, leading the market to rally to a new high.
The Brazilian stock market was severely impacted by high inflation during 2022-2023, leading to interest rate hikes from 2% to 12%. This rapid increase, coupled with a tepid recovery from the COVID-19 pandemic, hammered the economy, making Brazil's stock market one of the worst performers among the BRIC economies. With much of the pain already factored into market valuations, the Brazilian stock market is poised for a strong rally once the government begins to cut its economically stifling double-digit interest rates.
The Russian stock market is not represented in this review as investments have been prohibited since the Russia-Ukraine war.
ASEAN - Singapore, Indonesia, Malaysia, Thailand, Vietnam
The crown of the best performing market in ASEAN from 2022-2024 belongs, surprisingly, to Singapore. The Singaporean economic system proved resilient during the COVID pandemic shutdown, and its strong currency helped buffer the effects of global inflation. Overall, ASEAN has underperformed compared to the US stock market, as high inflation and a slowing Chinese economy have caused disruptions in many ASEAN economies.
A dark horse emerged at the end of 2023: the Vietnam stock market started a strong rally, benefiting from the global decoupling from Chinese manufacturing. Vietnam's cheap labor costs, improving infrastructure, and expanding middle class have made it a primary beneficiary of this shift.
Meanwhile, the Indonesian stock market experienced a decent rally in Rupiah terms, but when converted to SGD, it shows a decline due to a 20% depreciation of the Rupiah since the COVID pandemic. Despite this, Indonesia shows great promise for the near future as it struggles to recover from the pandemic and global inflation.
The Thai stock market was the worst performer among ASEAN nations, hampered by poor corporate earnings, lackluster domestic spending, and a slowed Chinese economy. The Thai baht has weakened significantly due to lackluster exports, and the semiconductor boom did not benefit Thailand as it is not part of the semiconductor supply chain. While analysts' assessments of Thailand remain below those of Indonesia, the low valuation and gradual improvement of economic activity in China and the ASEAN region may fuel a stock rally in the future.
In a nutshell
A key takeaway from the past two years is that whether a stock market outperforms or not largely depends on whether the country is part of the semiconductor supply chain, and thus benefits from the next IT revolution. With regenerative AI technology still in its early stages and expected to drive a decade-long productivity boom, technology and US equities are positioned at the center of this revolution and will likely form the core of investment portfolios in this market cycle.
Meanwhile, emerging markets such as Thailand and Indonesia are beginning to recover from the COVID shutdown and hyperinflation-induced recessions, presenting longer-term value investments with uncertain recovery timelines. The question remains: even if these markets recover, will they deliver mid to long-term performance that exceeds those of countries participating in the AI revolution?
Among the emerging economies, India and Vietnam are poised to benefit from the AI revolution, as technology companies expand their manufacturing capabilities in these countries. China, on the other hand, remains a potential value play with its low valuations and potential for market growth. However, its deflating property market continues to drag on the economy, requiring time for the government to address issues in the property sector before more meaningful gains can be realized.
Portfolio performance and review
The portfolio rallied on news of strong earnings from tech companies and consistent growth in the US economy. The Cash portfolio gained +1.32%, CPF-OA +1.30%, SRS +1.10%. I did not perform the switch for India as proposed in the previous newsletter as I wanted to observe the impact of the India general election before deciding to allocate a tactical portfolio into the country. With the dust settled and the stock market liking what they see in India, I will be performing the switch in the coming days.
The market had a good rally for the first half of the year and I expect the market to take a break for a few months. Now that the easy money is made, it becomes more challenging to pick the winners for the next leg of the market rally and these few months will reveal more clues if those underperforming markets will catch up to the market leaders and is deserving a position in our portfolio.
Click here for the Fund Factsheet for May 2024
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