Global equity valuations are stretched, characterised by the U.S., Europe and Japan all sitting at or near record highs.
However, amidst the elevated valuations, pockets of opportunity are emerging—especially within U.S. small-caps, buoyed by favourable economic conditions, and in Latin America, where compelling valuations align with strong fundamentals.
Global equity markets are painting a nuanced picture heading into the second quarter. While the U.S. market’s ascent to record highs has been led by the Magnificent 7, pushing large-cap valuations to their limits, Europe and Japan have also etched new benchmarks.
Seema Shah (pic), Chief Global Strategist at Principal Asset Management said: “The contrast between the stretched valuations of large-caps and the slightly more attractive figures for small- and mid-caps suggests a potential pivot point for investors. In particular, small-cap’s appeal is likely to be bolstered by the goldilocks combination of a soft landing and imminent rate cuts on U.S. Small-Caps.
On Japan, “Japan holds intriguing opportunities despite elevated valuations. The return of inflation, positive interest rates, and corporate governance reforms present opportunities for unlocking value despite its elevated valuations.”
On emerging markets, Seema added, “Emerging markets present a mixed bag. India remains on the pricier end, and China’s market is likely to continue struggling unless policymakers introduce new and impactful stimulus measures. Latin America, however, is currently benefiting from some of the most attractive valuations globally.
“When combined with the region’s positive fundamentals, a strong investment case for Latin America is beginning to emerge.”
In the U.S., the contrast between the stretched valuations of large-caps and the (slightly) more attractive figures for small- and mid-caps suggests a potential pivot point for investors.
In particular, small-cap’s appeal is likely to be bolstered by the goldilocks combination of a soft landing and imminent rate cuts. Europe, on the other hand, offers a more subdued outlook despite being meaningfully less stretched than the U.S.—reflective of the region’s economic stagnation.
Conversely, in Japan, the return of inflation, positive interest rates, and corporate governance reforms present opportunities for unlocking value despite its elevated valuations.
Emerging markets present a mixed bag. India remains on the pricier end, and China’s market is likely to continue struggling unless policymakers introduce new and impactful stimulus measures.
However, investors should keep their eye on Latin America, which currently benefits from some of the most attractive valuations globally. When combined with its positive fundamentals, a strong investment case for the region is beginning to emerge.
Global valuations undoubtedly are stretched, but a closer look reveals pockets of potential opportunity that can benefit from the constructive macro backdrop.
