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        Opportunities Outside the Mega Caps Shine

        • Financials, Utilities and Industrials outperform Mega Caps in 2H 2024
        • Best Performing Themes: Value, Min Volatility & Small Caps
        • A World of Opportunity: Preferred Industries by Region
        Bruce Raymond Apted
        Head of Portfolio Management – Asia Pacific, Systematic Equity Active

        Financials, Utilities and Industrials continue to Outperform Mega Caps

        Since July we have seen a change in market leadership with the Artificial intelligence (AI) market darlings underperforming and Financials, Utilities and Industrials outperforming. The market darlings have exhibited volatility since peaking in Mid July. Lofty growth expectations and rich valuations have contributed, along with increasing concerns about the ultimate return on investment from AI. At the same time, central bank easing, lower inflation and moderate global growth has provided a positive backdrop for opportunities outside the mega caps. China stimulus measures have further improved the outlook for global growth and more cyclical companies.

        Figure 1 highlights on the extent of the rotation. We have seen excess returns from Utilities (+11%), Financials (+7%), Industrials (+3%) and Materials (+1%). In contrast, we have seen a de-rate in the more expensive Technology (-3%), Communications (-4%) and Discretionary (-2%) sectors.

        Many market capitalized indices remain extremely concentrated relative to history. The strong returns generated by the large cap companies has helped generate above average returns for the indices but also makes them more dependent on the same large cap stocks for continued performance. Concentration adds to future potential volatility of these indexes. Fortunately many opportunities exit outside the mega capitalized stocks.

        Best Performing Themes: Value, Min Volatility & Small Caps

        As investors have rotated into Utilities, Financials and Industrials and away from more expensive larger cap companies we have seen a number of out of favour themes outperform. Figure 2 provides the excess returns for several markets themes since 30 June 2024. Value, Min Volatility and Smaller companies have outperformed while Growth, Momentum, and Quality have underperformed. Min volatility and smaller companies have generally been out of favour in recent years and the outperformance in these cohorts will be a relief for many investors with these tilts.

        Best Opportunities outside the Mega Caps – Highest Ranked

        At State Street Global Advisors we scan >20,000 securities across the globe to uncover opportunities. We evaluate many aspects of a companies fundamentals. The best company’s score well across Quality, Valuation and Sentiment. Figure 3 highlights the “preferred” industries that on average rank in the top 30%. As at 30 September 2024, there are 20 Industries/ Regional groups that offer “preferred” opportunities. A wide range of business types from European Utilities and Banks to North American Building Products, Containers and packaging to Japanese Energy companies.

        Figure 3: Most Preferred Industry by Region

        Industry North America Europe Japan China
        Multi-Utilities Preferred Preferred    
        Water Utilities       Preferred
        Diversified Telecommunication Services       Preferred
        Wireless Telecommunication Services     Preferred  
        Household Products Preferred      
        Banks   Preferred    
        Consumer Finance       Preferred
        Building Products Preferred      
        Industrial Conglomerates Preferred      
        Trading Companies & Distributors     Preferred  
        Transportation Infrastructure Preferred      
        Construction Materials     Preferred  
        Containers & Packaging Preferred   Preferred Preferred
        Communications Equipment Preferred      
        Technology Hardware Storage & Peripherals     Preferred  
        Energy Equipment & Services     Preferred  
        Oil Gas & Consumable Fuels     Preferred  

        Source: State Street Global Advisors  as of 30 September 2024. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.  

        The Bottom Line

        Highly concentrated indices are dependent on the continuing performance from the mega caps. Since July we have see a rotation away from the mega caps towards a range of other sectors and themes - Financials, Utilities, Industrials, Value, Low Volatility and Small Caps. For investors willing to look outside the mega caps there are a wide range of opportunities that offer diversification and return potential.

        More on Systematic

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