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Despite the not-so-rosy global economic outlook, stock markets are steadily rising. “This is partly due to interest rate cuts by central banks, which many interpret as a stimulus”, says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “However, it’s also important to understand that these rate cuts are a sign of a sluggish economy and the last resort to prevent a recession.” Investors should therefore remain cautious.

In the U.S., the Big 7 – top tech and AI companies – are losing significant dominance. “Here, the ambitious valuations are increasingly being critically questioned, as no concrete monetization of AI investments is yet in sight”, says Gerlinger. The rising stock prices stem from the still-positive sentiment of market participants. “A soft landing for the U.S. economy is still expected”, Gerlinger adds. “Everyone is relying on interest rate cuts to improve economic prospects.” Stock markets are still pricing in a positive economic scenario, with ambitious earnings growth of up to 15 percent in the S&P 500, while bond markets expect the opposite.

In Europe, the strong stock market performance is even more at odds with the weak economic environment in the Eurozone. “Policymakers still can’t find a recipe to stimulate the economy, especially as budget constraints limit their options”, says Gerlinger. The moderate economic growth in China also does not provide any stimulus for Europe. However, European stock valuations remain attractive, and small and mid-caps have stabilized. “Similar to the U.S., hopes rest on the stimulus from rate cuts”, Gerlinger notes.

The situation in Japan is different. “Here, the prospect of further rate hikes looms like a sword of Damocles over the Japanese stock market”, says Gerlinger. “Inflation, at 3 percent by Japanese standards, will eventually force the Bank of Japan to act.” In contrast, favourable stock valuations, strong balance sheets, stock buybacks, and good dividends speak in favour of Japanese stocks. “Thus, Japanese stocks remain interesting”, Gerlinger adds, “though further rate hikes by the Bank of Japan could prove burdensome.” Consequently, the Yen may continue to rise, limiting risk from a Euro-investor perspective.

Stock markets in Emerging Markets remain attractive from a valuation perspective but are under pressure due to the trend toward deglobalization. “The hope for an economic recovery in China turned out to be short-lived”, says Gerlinger. Although Chinese economic growth of up to five percent is expected for 2024, this is far below the average of the past 20 years. “India, growing at almost eight percent, continues to attract investors with its strong performance”, Gerlinger concludes.