Equity valuations are inflated in the US and with more downside risk in 2024, investors should steer towards quality companies to avoid exposing their portfolios to riskier companies which could suffer on any signs of corporate earnings weakness, according to abrdn chief investment officer Peter Branner.
While equity valuations are more reasonable away from US markets, macroeconomic challenges remain and suggest investors should be cautious about the year ahead across global equity markets.
“With global growth running out of steam, it’s reasonable to expect that not all companies will be in a position to thrive this year.
“Uncertainty over inflation, peaking interest rates and lower economic growth rates present headwinds for corporate earnings this year. A focus on quality provides the best means of navigating this environment.
“History shows that companies with pricing power, strong balance sheets, durable competitive advantages and less cyclical earnings are better placed to deliver against expectations than the broader market,” he said.
According to Mr Branner, the wide range of economic scenarios suggests investors should focus on company fundamentals such as the strength of their balance sheets, ability to create cash flows and debt levels. As such, stock selection will be key to investors’ success.
“Steering capital towards quality businesses and investing for the long term are the best ways to mitigate equity risk and build exposure to sustainable earnings growth.
“The ability of quality businesses to demonstrate greater resilience and do better in a range of economic scenarios make them look appealing in uncertain times, over the short and longer term,” he said.
According to abrdn global head of equities, Devan Kaloo, global equity valuations look fairer over the longer term, with cyclically adjusted price-to-earnings ratios (CAPE) ratios are in the middle of their historic range.
“Equity prices in the middle of the CAPE range imply annualised returns of eight per cent over the next decade[1]. These are comfortably higher than US ten-year Treasury bond yields and in line with average global equity returns investors have enjoyed over the past 20 years.
“That makes global equities an attractive investment. In the short term, though, we see little support from valuations, and earnings are likely to be the primary driver of markets this year,” he said.
Mr Kaloo said equity valuation diversity suggests it may pay to look outside the US. China’s disappointing recovery has weighed on emerging markets however there is room to be selectively optimistic at the stock level.
“This is reinforced by the opportunity for policy support to gradually stabilise China’s property sector and boost consumer confidence. Additionally, attractive valuations versus other regions provide a reasonable starting point for stronger Chinese equity returns this year.
“Japan is another market that’s worthy of investor attention on account of an ongoing period of progressive structural change. Recent corporate governance reform has been well received by the market and is likely to continue to drive shareholder value. Alongside a pickup in household spending, we see Japanese equities being well placed to extend gains,” said Mr Kaloo.
