US and AI takes top spot for global equities but one country is potentially more attractive from a valuation standpoint, fund manager says
The global equity landscape has been a mixed bag, with experts saying the Canadian market has struggled to keep up the pace with its American counterpart. Other countries in the global market, however, like Europe, could end up overtaking the top spot.
“The US has been the place to be,” says Bimal Patel, senior fund manager for Canada Life Asset Management in the UK office. Canada’s underperformance can be largely attributed to the composition of the Canadian benchmark, which is heavily skewed towards value sectors such as financials, energy, industrials, and materials.
“Financials is about 35 per cent of the overall market,” he says. “It's quite significant, whereas, when you think about technology, for example, it's only about 10 per cent," Patel explains, pointing out that the Canadian and UK markets are strikingly similar. The US market, in contrast, has been buoyed by the dominance of its technology sector, which has driven much of the global market's performance in recent years. “It’s very roughly 30 per cent tech and maybe 13 per cent financials, instead of 30 or 35 per cent financials.”
However, Patel suggests that this regime may be shifting, pointing to a lot of focus on AI. “I suppose there is a possible broadening out of the US market, not the global market. If US tech stops going up exponentially, as it has been doing, that that will help other regions’ financials,” he says.
In many ways, it is a US versus ex-US kind of environment, Patel believes, because investors are experimenting with different regions and different countries for different purposes. “If you want tech, by and large, you’ll probably end up in the US. If you want luxury goods, you'll probably end up in France.”
Ultimately, Patel says, it’s about understanding which sectors and factors investors want exposure to. “Having kind of the global remit allows us to do that so that we can control exposure, let's say to the US and to the tech sector,” added Patel.
Head of global long term unconstrained at Martin Currie, part of Franklin Templeton, Zehrid Osmani also emphasizes the dominance of U.S. equities, which have been largely driven by the strength of major technology companies, many of which are beneficiaries of the AI boom.
"We've only had two of the 'Magnificent Seven'—Nvidia and Microsoft—in our global strategies," Osmani notes. Nvidia has seen significant gains, up 156 per cent in the last year, driven by its leadership in GPUs, a critical component for AI's need for fast computing. However, Osmani cautions that much of the AI hype could be "frothy," as many AI-exposed stocks have not seen corresponding upgrades in sales or earnings projections, despite their price increases.
“The importance here is to be exposed to companies that are visibly capturing the opportunity by monetizing or [who are] best positioned to monetize,” Osmani stated. He also points out that Microsoft, another key player in the tech space, is well-positioned to capitalize on AI across three areas: its stake in OpenAI, its cloud infrastructure, and enterprise software like Copilot, which is expected to play a significant role in monetizing AI capabilities.
Osmani expresses confidence that "the market still underestimates the potential size and speed at which this AI market will materialize," particularly as corporations ramp up investments to stay competitive.
As for across the pond, Osmani believes that European equities offer better valuation support compared to the US market, despite the geopolitical risks posed by the situation in Ukraine. "When we look at other developed market equities, we think European equities offer better valuation support, both versus a long-term history and relative to the US market," he said, noting that Europe is typically more cyclically sensitive to the global cycle.
"The way we would qualify the picture in terms of economic leading indicators is that they seem to be pointing to weakening, whether it's us, whether it's China, whether it's Europe. That could put potential downside risks to the economic forecast," he added.
