Schroder Investment: The range of driving factors in the financial market is expected to expand, creating opportunities for active investors.

Schroders global portfolio manager Simon Webber pointed out that in August 2024, a financial market adjustment led to a decrease in stock valuations, reflecting uncertainty in the US economic outlook. However, due to strong corporate earnings growth and a more accommodative monetary policy outlook, stocks quickly regained lost ground. After experiencing a very strong performance for nine months, the stock market is more susceptible to adjustments, but corporate fundamentals remain robust, and increased volatility can provide opportunities for reallocation in financial markets. Regarding the potential return and risks of global stock investments, Simon Webber stated five key points. First, despite its long history, the UK remains one of the most attractive global markets in terms of valuations. Stocks in markets outside of the US have more attractive valuations, especially in the UK, Japan, and emerging markets. However, aside from the growth stocks of super-large "tech giants" (which are driving up the overall price-to-earnings ratio (P/E) of the S&P 500 index), the valuation levels of the US stock market do not seem too high. Overall, tech giant stocks benefit from investment opportunities in related themes and strong fundamentals. In contrast, other industries in the financial markets have been struggling in a challenging operating environment, which has largely suppressed revenue and profit growth. Secondly, over the past year, a small number of stocks have been driving the majority of the stock market gains, resulting in very low market breadth. Currently, the market widely expects this gap to narrow, with overall market earnings growth expected to accelerate, while earnings growth for tech giants is expected to slow significantly. Over the past 18 months, strong profit growth for US super-large tech companies has been driven by cost control and continued revenue growth. In general, these companies still have excellent business operations and strong fundamentals, but they are more likely to face downside risks in terms of revenue and profit performance compared to other companies. From a regional perspective, stock market returns are also expected to broaden. Compared to the US economy, the European economy will be more susceptible to rate cuts, while Japan's real wages have turned positive after several months of contraction. Rate cuts will provide further support for these regions. In particular, European consumers hold a higher proportion of variable-rate mortgages (compared to the US) and businesses rely more on bank loans. In contrast, the topics discussed in the US financial markets have shifted from controlling inflation to avoiding economic recession. Although an economic recession in the US is not our baseline expectation, some regions may catch up. Thirdly, the improvement trend in corporate earnings in Japan is underestimated, which will continue to support the Japanese stock market. Currently, the Tokyo Stock Exchange and various government agencies are continuously implementing reforms aimed at improving corporate governance and capital efficiency. These measures should help make more effective use of excess funds and increase stock ownership rates which are extremely low compared to other developed markets. Therefore, the financial markets are paying more attention to shareholder returns and increasing investment and capital spending. A more normal inflation environment also prompts the Bank of Japan to change its policy from controlling the yield curve when most central banks globally lean towards monetary easing, further encouraging companies to focus on productivity and profitability. Schroders global believes that this will bring greater support for the yen, as the depreciation of the yen has eroded returns for foreign investors for most of the past decade. Therefore, companies primarily focused on the Japanese domestic market are likely to present more attractive opportunities. Fourthly, the US presidential election in November remains a major event of interest, and its outcome could have a significant impact on geopolitical relations. Overall, the policies and policy differences of the Democratic and Republican candidates in key areas have not yet been disclosed, and further clarification of policies may increase, rather than reduce, short-term volatility. Nevertheless, Schroders global believes that the impact will be evident in areas of significant disagreement such as trade tariffs, energy policy, relaxation of bank regulations, and drug pricing. Regardless of the election outcome, Schroders global expects trade policies to adjust the relationships between the US and its competitors, avoiding competition and prioritizing the US's leadership position in the high-tech industry. Finally, the wave of interest in generative artificial intelligence has been a major drive for stock price growth in the financial markets over the past year. Investors are flocking to beneficiaries in the tech industry, including semiconductor and data center sectors. However, the revenue generated by AI is less than one-tenth of the amount spent on it so far. Therefore, the financial markets doubt whether there will be enough returns in the future to justify the current level of infrastructure investment. Generative AI is still in its early stages, with significant potential to change business and productivity. However, its current level of electricity consumption, supply constraints, and revenue growth rate are facing stricter scrutiny. Questions have also been raised about whether there is an oversupply of related infrastructure on the market, which could lead to consolidation in stocks related to AI infrastructure.