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To date, 2024 has been another year of surprises in international financial markets, with global equities managing to outperform expectations across many markets. The MSCI world index (developed markets) returned an impressive 11% over the six months to June 12, despite major headwinds such as interest rates remaining higher for longer than expected, national elections in major countries, significant geopolitical conflicts in Ukraine and the Middle East, and escalating economic tension between the US and China.

Even Europe and the UK, both with sluggish economies, delivered 10% (Euro Stoxx 50 index) and 8% (FTSE 100 index), respectively, but emerging-market equities lagged, with a 5% return recorded by the MSCI emerging markets index.

There are key reasons for this broad outperformance, which were also in play in 2023:

  • For investors to beat the high US cash yield of 5% it is difficult for them to justify considering any other asset class than equity, which has the best potential for achieving a higher return. Equity earnings yields in most major markets (apart from the US) are also elevated — at or above 5% on a nominal basis and generally above their 10-year average — which gives them a higher chance of outperforming in future. On this basis, equities make for an attractive option for investors in the current conditions.
  • The fundamentals of some companies continue to surprise on the upside. A high percentage of listed companies have beaten their earnings per share (EPS) estimates in the latest earnings season, with the highest being 81% of S&P 500 companies reporting in the first quarter. The Nasdaq was not far behind with 78% of companies topping EPS estimates, and 67% of reporting FTSE 100 corporates also beat their forecasts.

Even more importantly for investors, the characteristics of this year’s outperformance provide a valuable diversity of choice. There is a large differential between investment returns recorded by the top 100 performers listed on the MSCI all country world index — the highest, US-listed Super Micro Computer, returned 170% in the past six months, and the lowest, US-listed Meta, “only” 43%.

Strong returns

And unlike 2023, when a handful of US technology companies dominated global markets, so far this year there is a wide mix of countries with top performers. US-listed companies are only 22 of the top 100 performers in the MSCI all country world index over the past six months.

Equally, we see strong returns across sectors other than technology, including consumer staples, financial, industrial and even utilities. Nontechnology companies are also taking advantage of advanced technology such as artificial intelligence (AI) to improve their fundamentals through increased efficiencies and enhancements in many areas of their businesses. 

We believe the biggest winners over the next decade will be companies that operate at the intersection of three strong structural growth themes: the move to a low-carbon world, infrastructure investment and innovation. These businesses are most likely to receive cash flows regardless of the vagaries of the global economy and its cycles.

Not only will demand for cleaner energy sources increase, but a larger portion of that demand will be met by a variety of renewable sources. This leads to a more fragmented power distribution system with less predictable energy flows. AI is fundamental in ensuring that this more complex system operates successfully, and companies that can provide this service should see strong long-term demand in future.

There is an estimated $94-trillion shortfall in infrastructure spending that is needed globally over the next 40 years to keep economies growing, and in SA the gap is about $441bn. This makes it a significant growth area.

Lose money

We also look for a high degree of innovation. When we see innovation in companies that are also operating in or adjacent to the energy transition and infrastructure fields we view this intersection as probably the most powerful way to identify those businesses that will most likely be the super performers of the next decade.

What we can see from 2024 so far is confirmation that forecasts are often proved to be wrong (sometimes very wrong), and investors will continue to be surprised by short-term financial market moves. Trying to predict what will happen and which companies will benefit the most from short-term events is a risky approach to investing at best and one that is likely to lose money.

We believe a more successful approach is to invest in attractively valued companies that are likely to withstand the ups and downs of the global economic cycle over time. These businesses will be underpinned by rapid growth in demand for their products and services, and by their ability to innovate or to adapt and use advances in technology to continue growing over the longer term.

• Fedeli is chief investment officer: equities, multiasset & sustainability at M&G Investments (UK). 

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