Global Equity Investor insight | April 2024

Apr 02, 2024
Jeremy Richardson 80 x 80.jpg
Jeremy Richardson

Is corporate profitability improving?

Reflecting on the past month, Jeremy Richardson explores;

  1. Modest improvement in the global economic situation
  2. Continued signs of uptick in the U.S. industrial activity, and some green shoots in Europe
  3. Dispersed stock performance

Jeremy Richardson

Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update.

Now, they say the definition of happiness is reality, less expectations. And for global equity investors, the reality seems to be getting better, at least when thinking about the global economic situation.

We have seen continued signs of improvement in U.S. industrial activity. And of course, the U.S. is also still benefiting from pretty good strength from the U.S. consumer as well. But if we turn our gaze to Europe, there also, what appears to be green shoots. If you think about German industrial activity, although the headline numbers still show contraction, the last five months have actually been showing some modest improvement.

So, this is all supportive, I think, of the sort of transition that as investors we’ve all been on over the course of the last 18 months or so, where we started off very worried and concerned of what the economists were calling a ‘’hard landing, driven by high interest rates, towards a ‘soft landing’, and where we are today, which I would say, the consensus view, is that recession could be avoided entirely. This is a no landing. And that means the outlook for corporate profitability should be improving from here.

And it would be nice to think that the reality was all that investors had to worry about. But expectations, as the definition of happiness suggests, also need to be taken into consideration. And these expectations are that the profits will begin to improve and share prices have already begun to respond to that. And so, we have seen global equity markets continue to rerate higher, and in anticipation of improving profits.

And that does cause a degree of fragility, a little bit of uncertainty because we are dependent for continued momentum on those profits now coming through, as they should. But there’s always you know, you'd like to see it, to believe it. Now, when thinking about the health of the markets, and in particular to where the performance is coming from, one of the big narratives of the last year, 2023, was how narrow the global equity markets have become with a particular focus on the so-called ‘Magnificent Seven’.

Now, this group of predominantly large U.S. technology companies had become so large and dominant they were really driving the U.S. market and global markets forward. But over the course of 2024 year to date, that grouping no longer appears to be quite so dominant. In fact, we’ve seen much greater dispersion of performance within those ‘Magnificent Seven’ stocks.

Now, from an investors point of view, actually, this means that we need to be very careful about stock selection. Just can’t buy the group, fire and forget, you need to be choiceful when making those types of selections. But also, I would say that actually the fact that we’ve been able to continue to sow positive momentum in global equity markets, with a more dispersed performance from the ‘Magnificent Seven’, actually speaks to improving health of global equity markets. We are seeing performance broaden out, perhaps because investors are now beginning to anticipate an improving economic situation. So, although we are sort of waiting with bated breath to see how corporate profits come through for the rest of this year, this improving market breadth, I think actually is something that as investors and as stock pickers, we should all welcome.

I hope that’s has been of interest. I look forward to catching up with you again soon.
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