Much like in football, where a match can dramatically change between the first and second halves, 2024 is shaping up to be a year of two distinct phases in the global markets.
The first half of the year has seen a rapid selloff in August, with markets temporarily caught offside by a growth stumble, an ill-timed Bank of Japan interest rate hike, and a synchronous global unwind of popular positions.
This period of sudden rallies and sharp corrections underscores the need for a different playbook as we enter the second half — one that emphasises disciplined strategy, adaptability and the ability to seize opportunities as they arise.
Here are some strategic plays to help navigate this potential game of two halves.
Taking each game as it comes
The landscape of US monetary policy has been volatile this year. At the start of 2024, the market anticipated up to seven rate cuts, a figure that has since been revised down to four.
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This swing, in our view, reflects markets myopically trying to interpret the US Federal Reserve’s (Fed) moves, driven by evolving economic indicators and shifting sentiment.
Chair Powell’s recent comments at Jackson Hole provided some clarity, suggesting that while rates will eventually come down, the pace may be slower than previously expected.
Treasury movements: The two-year treasury yield, often a bellwether for monetary policy, has seen significant movement, shifting by over 1% since the beginning of the year. This movement has brought the 2s–10s yield curve close to un-inverting, signalling potential changes in market sentiment.
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Given these developments, we have strategically taken profits from tactical positions in two- and five-year bonds added in April, recognising the shifts in risk and return dynamics.
Longer-duration treasuries have been a strong total return generator since April, as real yields continue to offer attractive compensation for risks. In our view, there is still plenty of room to rally, should the markets’ relatively positive expectations for growth get challenged again by weaker-than-expected data.
Equity vulnerabilities: The rally in US equity markets, particularly in response to better-than-expected jobs data, has brought valuations back to elevated levels. However, these valuations look now more vulnerable to disappointment, especially if economic growth fails to meet optimistic forecasts.
The key risk in any negative surprise in the economic data could trigger a sharp correction, making it crucial to be selective and focus on quality in equity exposure.
A marathon, not a sprint
Japan’s market continues to present a compelling long-term structural case, even amid short-term volatility.
The ongoing efforts toward nominal reflation and corporate self-help are gradually transforming the landscape, with the entry point today appearing, in our view, particularly attractive for a market whose long-term returns will be driven by improving earnings delivery and shareholder returns.
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Corporate governance reforms: The Tokyo Stock Exchange’s tracking of corporate governance reforms, continues to show consistent progress. Companies are focusing on improving returns on equity (ROE) and price-to-book value (P/BV), reducing cross-shareholdings and increasing returns to investors through buybacks and dividends.
These reforms represent fundamental improvements that are likely to drive long-term performance, independent of the yen’s volatility or shifts in global carry trade.
Resilience in the face of volatility: Despite recent market fluctuations, the long-term outlook for Japan remains robust.
Those who are patient and focused on the fundamentals will likely be rewarded as these structural reforms continue to take hold. Japan’s market may not offer the same immediate gains as more volatile regions, but its steady progression suggests a reliable path to long-term returns.
No easy games at this level
China continues to face significant macroeconomic headwinds, from slowing growth to regulatory pressures. However, these headwinds have also created opportunities for those willing to look beyond the immediate uncertainty.
Valuations opportunities: China’s market has a history of offering attractive tactical buying opportunities during periods of negative sentiment. October 2022 and January 2024 are prime examples where overly pessimistic views led to attractive entry points.
Today, with markets having drifted around 10% from recent highs, we believe valuations are once again at levels that could be considered supportive, especially for those with a contrarian view.
Operational resilience amid headwinds: Despite the challenging macroeconomic environment, many Chinese companies are focusing on their core businesses, improving operational efficiency and generating stronger cash flows.
Buybacks and dividends are on the rise, even as broader market sentiment remains cautious.
This operational resilience, combined with low valuations, suggests that certain sectors in China could offer compelling opportunities for those with a long-term perspective.
Moneyball — finding value in overlooked opportunities
The valuation gap between European and US equities continues to widen, with European equities trading at roughly two-thirds of the S&P 500’s multiple.
This disparity is partly due to the differing economic growth profiles of the US and Germany, with the US economy generally exhibiting stronger growth.
Additionally, the composition of these markets plays a role; the US market has a larger share of high-growth tech stocks, while Europe has more value-oriented sectors.
Alpha opportunities in European markets: European companies, particularly those in industries where they lead globally, are trading at meaningful discounts compared to their US peers. This discrepancy presents a potentially lucrative alpha opportunity for those willing to dig deeper and look past the headlines concerning Europe’s economic challenges.
Disciplined stock-picking: The key to unlocking value in Europe lies in disciplined and robust stock selection. Focusing on fundamentals and valuation, rather than being swayed by broader market sentiment, can result in the identification of undervalued gems that offer significant upside potential as the market corrects over time.
Final whistle: ‘Goals win games, defences win titles’
The recent period of volatility should serve as a reminder to investors that successful investing requires both offensive and defensive strategies.
Just as in football, where scoring goals is crucial; a solid defence ultimately wins titles — the pursuit of returns must be balanced with careful risk management.
While chasing returns is essential, doing so at inflated valuations can lead to significant risks.
Maintaining discipline, adhering to a well-thought-out strategy and being flexible enough to adjust positions as market conditions change are critical for long-term success.
Those who can balance the need for growth with the importance of managing risk will be best-positioned to navigate the challenges ahead.
Michael Dyer is investment director, equity and multi asset, at M&G Investments