Source: Barron's Author: Reshma Kapadia
For some of the bull markets that have emerged this year, the carnival may not be over yet.
Reducing holdings of winners' stocks and buying more losers' stocks is typical year-end investment advice, but for some of the bull markets that have emerged this year, the carnival may not be over yet.
Louis-Vincent Gaffe (Louis-Vincent Gaffe), co-founder of investment research firm Gavekal Research, recently predicted that Latin American stocks and bonds, Japanese stocks, uranium, and gold will rise further next year. Meanwhile, US stock technology “Big Seven” —$Apple (AAPL.US)$,$Amazon (AMZN.US)$,$Alphabet-A (GOOGL.US)$,$Meta Platforms (META.US)$,$NVIDIA (NVDA.US)$,$Microsoft (MSFT.US)$und$Tesla (TSLA.US)$——There is a possibility that the upward momentum will be lost. Furthermore, he also believes that the Indian stock market, which has surged this year, has become more expensive.
Gaffe pointed out that the shareholding concentration of the “Big Seven”, whose stock prices have about doubled this year, has become very high because these 7 stocks have outperformed the MSCI Global Index for 9 years in the past 10 years. Gaffe believes that these stocks range from “fully priced” to “ridiculously expensive.”
Gaffe said that if the Fed continues to raise interest rates, these most popular assets may be in trouble. If the market generally falls, these stocks are the most likely to fall. At the same time, if the Fed cuts interest rates, the US dollar will fall, and the attractiveness of international stocks will rise as a result.
If the US dollar weakens, the Indian stock market will also receive a boost, but the Indian stock market has already risen sharply this year. Attracted by India's strong economic growth prospects, investors looking for opportunities outside of China have set their sights on India. The country's government is actively investing in infrastructure, attracting a large number of companies that want to diversify their supply sources.
While cheap oil imports from Russia have strengthened the Indian government's fiscal strength, increased competition between the US and China has also strengthened India's influence internationally.
Gold and Latin American stocks are among potential winners in 2024
Strategist at Ned Davis Research believes that as the economic prospects of India and China diverge, the weight difference between the two countries in the MSCI Emerging Markets Index is narrowing. China's weight fell to 27% from 40% at the end of 2020, and India's weight rose to 17% from 10% at the end of 2020.
Strategists believe that this change has given the MSCI Emerging Markets Index more opportunities to outperform other market benchmark indices. If India's weight in this index actually exceeds that of China, the chances of outperforming will be even greater.
Gaffe pointed out that although the factors behind investors' optimism about the Indian stock market are “convincing,” the Indian stock market has outperformed most markets in the past five years, and Indian stocks have become very expensive. At a time when other market performance is improving (including the rise driven by China's economic improvement next year), investors may adjust the allocation of some Indian assets.
The Latin American stock market is one of the markets where Gaffe believes there is an opportunity for further growth, which may give a boost to the MSCI Emerging Markets Index. Although the Mexican stock market has been outperforming the US stock market since April 2020, and the Brazilian stock market is also basically on par with the US stock market, there are currently not many investors entering the Latin American stock market, so stock prices are still cheap.
After the COVID-19 outbreak, central banks in Latin America quickly took countermeasures after seeing rising inflation. This is one of the reasons why the region's stock markets have performed strongly. This has put the Latin American stock market ahead of the Federal Reserve's vigorous monetary policy tightening. The US stock market was hit by interest rate hikes in 2022 and most of this year, and the Latin American stock market was relatively less affected.
iShares J.P. Morgan US Dollar Emerging Markets Bond ETF ($iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB.US)$) The allocation ratio for the Latin American market is about 30%, and this ETF has risen 7.6% over the past year. iShares Latin America 40 ETF ($iShares Latin America 40 ETF (ILF.US)$) It has risen 34% over the past year, and Gav believes there is still more room for growth.
Gaffe said, “The valuation of Latin American bonds and stocks is still very attractive, but the share held by foreign investors is generally low. Currently, interest rate cuts are more likely. There is nothing more beneficial for re-valuing the stock market than a combination of economic growth and falling interest rates.”
As Japan emerged from decades of deflation, the Japanese stock market also entered a bull market. The Nikkei 225 Index once again broke through 30,000 points. The last time it reached this level was in 1989, but since investors allocated less to Japanese assets, few investors seem to have paid attention to this. Gaffe believes that the valuation of Japanese stocks is “not high,” and the yen, which is still weak, is expected to boost the profitability of Japanese companies.
If the global economy slows down, the Japanese stock market is likely to fall because many Japanese industrial and manufacturing companies are relatively vulnerable to economic cycles. However, Gaffe believes that at a time when competition between China and the US is changing the global order, if the global economic growth over the next 10 years is more centered on Asia and Europe, then Japanese companies will be in an advantageous position. Furthermore, Japan may also usher in a boom in the tourism industry.
Gold is also a popular investment target in 2024. Gold has outperformed US Treasury bonds since 2015, and Gaffe's optimism about emerging markets supports the further rise in gold prices: for cultural reasons and other reasons, demand for gold in developing economies is often stronger.
Furthermore, gold miners are less likely to increase gold production. Gaffe pointed out that weak stock prices have slowed the pace of expansion of gold miners, especially when previous capital expenditure did not bring very good results.
Japan Mitsubishi UFJ Financial Group ($Mitsubishi UFJ Financial Group (8306.JP)$) Emerging Market Research Director Ehsan Khoman (Ehsan Khoman) is also bullish on gold. Horman and his team said in a recent report to clients that the most promising asset for 2024 is gold. The team expects that the Fed's interest rate cut, strong demand from central banks, and the role of stored value during the gold crisis are all reasons why the price of gold will reach a record high. Over the past year, the SPDR Gold Shares ETF has risen 13.5%.
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