Equity Insights
Key Highlights:
- Global equity markets are transitioning to a more regionally-diverse landscape, with Europe and emerging markets now well positioned to challenge US leadership due to attractive valuations, improving economic conditions, and structural changes.
- European equities, particularly value and small caps, stand out due to extreme valuation discounts and stabilising economic indicators, offering potential for mean reversion and structural rerating.
- Factor performance is also shifting, with markets no longer confident in any one style and rotating defensively.
A new global equity regime
Global equity markets have reached a turning point, as the long-standing dominance of US equities faces mounting challenges. For over a decade, US markets thrived on the strength of the ‘Mag 7’ technology giants, a resilient economy, and a strong dollar. However, stretched valuations, economic headwinds, and a weakening dollar are prompting investors to explore opportunities beyond the US. Europe and emerging markets, supported by improving economic conditions, are now well positioned as compelling alternatives. Structural changes and valuation anomalies are further driving this shift. As equity markets go through this transitional phase, investors should re-anchor their strategies in structural and valuation fundamentals.
The case for European equities
European equities have long been underrepresented in global portfolios, but this trend may be reversing. The valuation gap between US and European equities has widened to near extreme levels, creating opportunities for mean reversion. Value stocks and small caps in Europe particularly stand out, with historical discounts relative to large caps and stable earnings growth. Fiscal initiatives, such as Germany’s infrastructure spending, and stabilising economic indicators are supporting this recovery. Additionally, European banks and small caps are benefiting from dividends, share buybacks, and improving fundamentals, despite trading at historically low valuations. These factors position European equities as a compelling opportunity for long-term investors.
Factor performance shifting from status quo
Historically, growth, quality, and momentum factors have dominated, particularly in developed markets, driven by large-cap technology stocks and the trend towards passive investing. However, recent rotations suggest markets are adopting a more defensive stance amid heightened uncertainty, with no single style commanding confidence. Regional divergences are also evident. For example, large caps have consistently outperformed small caps in the US, but this trend is less pronounced in other regions. Emerging markets, particularly in Asia, are seeing a resurgence in small-cap performance, driven by domestic demand and improving fundamentals. This rotation in factor leadership highlights the importance of a nuanced approach to factor exposures in today’s evolving market environment.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The views expressed above were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way, HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target. Past performance does not predict future returns." Sriramya VaranasiPlease add: "The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The views expressed above were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way, HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target. Past performance does not predict future returns.