Johanna Kyrklund | Schroders CIO Lens Q2 2024: Don't let 90s nostalgia extend to your investment outlook

Although I am prone to a little 1990s nostalgia, today's conditions are different, and we need to keep this in mind when determining our investment roadmaps.

The challenge currently facing markets is that the very concentrated performance has left things looking lopsided. Understandably, there has been some concern about the direction of travel. However, a look at valuations under the surface shows that, globally, equity valuations are still quite attractive.

Stock markets have risen to new highs and some of the largest growth companies have powered equity markets while other markets outside the United States are trading at a significant discount to the US and below 15-year medians on most measures. We no longer think equities are expensive, as was the case in the 1990s.

Consider the Magnificent Seven (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla): While by no means cheap as a group, even they have delivered corporate earnings to support their valuations. We are still a long way from the world of the 1990s internet bubble when investors spoke about "price to clicks" in the absence of any tangible corporate earnings.

Looking at relative valuations within equity markets, we are staying neutral on mega-cap stocks, because we lack the catalysts to move underweight the Magnificent Seven. Furthermore, we believe that treating those seven stocks as a block underestimates the very different business drivers between the individual companies – the dynamics behind the growth at Amazon, Google and Microsoft are very different to Apple or Tesla, for example – and so we prefer to rely on our stock-pickers to cope with the idiosyncratic risks in each case.

We are now responding to the more attractive valuations outside the US by extending our equity exposure from the US to the rest of the world:

• We've liked Japan for some time due to its stimulative monetary policy and an ongoing cultural shift toward improved capital allocation and shareholder returns.
• A global manufacturing recovery is supportive of stocks in Europe, Asia, and Emerging Markets.
• There is also a window where falling inflation justifies rate cuts in the US and Europe, which is helpful to valuations and many emerging economies have already started to loosen monetary policy.

We have seen some broadening of market performance with 44% of stocks outperforming MSCI World All Countries compared to 34% in 2023. The environment may get more challenging as the year progresses should central banks fail to meet their inflation targets, but for now we remain positive on equities.

Turning to bonds, ongoing resilience in US data has led to a repricing of rate expectations in the US bond market which now more closely aligns with our view of a soft landing.

Valuations have improved but given that we still don't expect an imminent recession in the US; we retain a neutral stance. Our exposure to fixed income remains focused on generating income, rather than expecting a return to a negative correlation with equities or significant price appreciation. We still like gold, in spite of recent price rises, because it should benefit as central banks start to ease and also offers protection if inflation proves to be stickier than expected.

Finally, geopolitical tension is an unfortunate constant and there is a lot of talk of all the political elections this year, however, I would argue that we over-emphasize their importance. Politics matter but they tend to play out over months and years rather than days. We have already seen a shift in the political consensus towards greater fiscal intervention and protectionism which will remain in place irrespective of electoral outcomes.

This will contribute to a deterioration in the growth and inflation trade-off which means that we are very unlikely to go back to a world of zero interest rates. It also means that we need to reconsider sovereign risk as bond investors react to more fiscal spending. This again is very different to the 1990s, when a focus on fiscal rectitude structurally reduced bond market risks.

Geopolitical events are very difficult to position for because their timing is almost impossible to predict. The only true defence is to be diversified in your allocations by geography and asset class and, from a corporate perspective, to review the resilience of global supply chains.

In closing, there are significant differences in today's market conditions versus the tech boom of the 1990s. We need to consider what is happening now, rather than use the past as an investment map for the future.

*Johanna Kyrklund, Co-Head of Investment and Group CIO at global investment manager Schroders.