Curmi & Partners

Equities Charge Ahead Despite Global Uncertainty

By Gilbert Abela

The sanguine spirit remains vibrant as global equities surged ahead to conclude a remarkably upbeat first quarter, defying heightened geopolitical tensions and fears of an economic deceleration. Throughout the quarter, world equities delivered a total return of 11.7%, with a notable acceleration in March, contributing 4.8%. The rally has been widespread across all regions, but large companies have outperformed, particularly those in the US market.

Quality factors, encompassing profitability and robust balance sheet quality metrics, demonstrated superior performance, whereas high leverage struggled to keep pace. Within a mere three-month span, market sentiment shifted from anticipating five rate cuts to now projecting only three, implying a trajectory of higher interest rates in the forthcoming years. While fixed income returns have been subdued as a result, the equities market has found reassurance in the resilience of the economy.

The US based S&P500 surged by an impressive 13.3% and the Nasdaq gained 12%, outpacing most other major indices worldwide, except for Italy. The Italian MIB index spearheaded European equities with a remarkable year-to-date return of 15.1%. Meanwhile, the Euro Stoxx 600, comprising the continent's 600 largest stocks provided a total return of 7.7% year to date. The Emerging Asian markets represented by the MSCI Emerging Asia Index showcased resilience with a 4.6% gain in Euro year to date, propelled notably by the semiconductor cycle. Japanese export firms benefited from a weakened yen, while banks thrived amidst a reflationary environment, propelling the Japanese TOPIX index by 11.8% in Euro so far this year.

When it comes to industry sectors, the ascent of artificial intelligence (AI) has captured widespread investor attention, particularly within semiconductors and software companies. Notably, NVIDIA has emerged as a frontrunner in this technological revolution, positioning itself as a key supplier in the AI landscape. Market forecasts for NVIDIA indicate substantial growth potential in the years ahead, a trend that is reflected in NVIDIA's valuation. Meanwhile, Microsoft has capitalized on its indirect part ownership of ChatGPT software, enhancing its competitive edge in the market. AI is poised to revolutionize marketing tools, empowering advertisers to target their audience with unprecedented precision. Major competitors in this arena include Meta, owner of Facebook and Instagram, and Alphabet, owner of YouTube and Google services. Notably, while Meta has delivered remarkable return of 40.7% in Euro year to date, Alphabet's returns have been comparatively modest at 10.7%.

The financial sector is experiencing a favourable tailwind from rising interest rates and rising productivity as financial companies become more digitized. In fact, the MSCI World Financials Index has been up 13.3% year to date. With a shift towards online banking, financial institutions are reaping the benefits of reduced labour costs, enabling them to expand their operations without significant increases in headcount. In parallel, advancements in manufacturing are evident, with the adoption of cutting-edge software and artificial intelligence tools to refine product design and streamline manufacturing processes. Furthermore, the aerospace and defence industries have capitalized on heightened geopolitical tensions, witnessing increased investments from European nations in military hardware and ammunition. While the spotlight increasingly shines on AI in healthcare with its potential to revolutionize medicine discovery, weight loss drugs have dominated the industry. Notable players such as Novo Nordisk and Eli Lilly emerged as market leaders in this arena.

Within the energy sector, there's a palpable shift towards greener energy sources, although our economy's dependence on fossil fuels remains undeniable for now. Against this backdrop and Brent oil reaching $87.48 as at end of March, energy companies are thriving with ample cashflows. As exploration for new fossil fuel is being curtailed Energy companies are increasingly choosing to return excess cash to investors through share buyback strategies. Investors who are not taxed on capital gains can simply sell some of their positions to replicate income from dividends at a tax advantage. Navigating the equities market landscape is undoubtedly challenging, yet equities persist in offering appealing returns.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.