Looking ahead to 2025, it’s a richer outlook for Alpha
Reflecting on the past month, Jeremy Richardson explores;
Clarity following the results of the US election has been positive for global equity markets, but it’s the good news you don’t see in the papers that’s going to feed into investment opportunities.
Consumers making their own choices about good value is driving a mixture of company results, representing opportunities for stock pickers.
Tension between results and valuations, is leading to a much richer environment for alpha, irrespective of what happens with market beta.
Watch time: 4 minutes, 47 seconds
View transcript
Hello, this is Jeremy Richardson for the RBC global equity team, here with another update. Now since we last spoke, we've had the results of the US election and for global equity markets it's been actually a positive development, because we've been able to avoid a contested outcome. That had the potential to really disrupt progress, but we've instead gone from a situation of uncertainty, to now one of much greater clarity.
I say clarity, of course there's still a lot of debate about what the new administration will do in terms of policy and how that policy may shape markets and industries, but I think as investors, we need to bear in mind that it's going to be newspaper headlines responding to controversy, and potentially even bad news that will be driving newspaper sales, and a lot of the public debate.
A lot of the more positive, incremental news, you don't actually get to see in newspapers, and so we need to bear that in mind when we're thinking about things like supply side reforms and how that impacts choices of entrepreneurs, founders, new businesses; Because over time, that's where real value wealth creation occurs in the real economy and that has the potential to feed through into investment opportunities.
The second thing I want to touch on is the results season. I kind of feel as though this is a repeat of what we've been saying the previous two results seasons, and that in Q3, we have a similar sort of mix where it seems to be margins a bit more than sales revenue, that have been driving the results that we've been hearing companies report.
Well I would say that’s good news and bad news, the market's response to that has been amplified over this quarter and as part of that amplification, we see that in some of the company examples. So, Walmart, had very good numbers, received positively. In contrast, target really struggled. TJX, the discount clothing retailer, good numbers, received positively. In contrast, Coles really struggled. And so, you know, we often hear people talk about the US consumer as if there's one single individual, but actually this is a good reminder that there's over 300 million individual US consumers, and they're all making their own choices about what's best for their dollar, and how they can extract the best value from that, and those choices are leading to different outcomes for companies, and that represents opportunities, I think, for stock pickers.
Just on that opportunity for stock pickers, one of the other things I just want to highlight is this sort of continuation of the trend that we saw began to emerge in Q3, where the market is no longer just being driven by large cap companies. Yes, the large caps are doing reasonably well, but we are seeing now the smaller mid-caps also participating in that.
Now, this is largely a US phenomenon, which doesn't mean to say that small and mid-cap stocks are struggling outside of the US. They aren't in particular, it's just that we never really saw the same levels of market concentration outside of the US as we did in the US. So the fact now that we are seeing much greater breadth within the really important US market, I think is actually a very helpful dynamic, for stock pickers.
Which brings me, I guess, to the final point to make, which is around the nature of the market itself, and in particular around the sort of tension between results and valuations. It is true to say that, you know, the market valuation in terms of the P/E multiple of the market generally has been rising over time, and of course, the higher the valuation, the greater the burden of proof that companies have to deliver in order to be able to sustain that valuation. And so, we are seeing some economists and strategists begin to sort of raise questions about how much further the market can go when looking ahead into 2025, you know we're not economists or strategists, we'll leave that to the experts, but one of the things I would highlight is that although, there will be questions and debate about market levels, about market beta, when thinking about adding value to a portfolio, we're seeing actually a much richer environment for stock picking alpha, because of that growing diversity and that market breadth that we're seeing across stocks, and also how stocks are responding to company fundamentals.
So looking forward to the year ahead, 2025, we're hoping that it'll be a good year for Alpha, irrespective of what happens with market beta. I hope this has been of interest, and I look forward to catching up with you again soon.