We’re in the midst of a 10-year bull run but many parts of the stock market are still trading below their all-time highs and certain areas are even looking cheap, according to Bank of America Merrill Lynch analysts.
The bank’s The Hitchhiker’s Guide to the Investment Universe report offers a primer for investors on the size, composition, risks, returns, flows and valuations of the bond and equity universe.
A recent FE Trustnet article looked at eight charts from this report that give some insight into the investment universe as a whole but here we dive into 10 graphs that show how conditions appear with equities.
Global equity securities outstanding ($trn)
Source: BofA Merrill Lynch Global Investment Strategy, World Federation of Exchanges
We start with the total size of the equity market, which has ballooned in recent years. Data from the World Federation of Exchanges shows the value of total equities outstanding has grown from $9trn in 1990 to $75trn today.
“Global equities tripled in value between the global financial crisis lows in March 2009 to their most recent peak of $90tn in January 2018,” BofA ML’s analysts noted.
Global equity market cap by region
Source: BofA Merrill Lynch Global Investment Strategy, Datastream, MSCI. Chart shows breakdown of MSCI ACWI Index market cap
As we can see, the US is the dominant country in the MSCI AC World by market cap as it accounts for $24.8trn or 55 per cent of the index, close to its record high.
This hasn’t always been the case, however, as Japan made up 52 per cent of the world equity index in 1989 while Europe was 35 per cent in 1998.
The evolution of ACWI equity sector composition
Source: BofA Merrill Lynch Global Investment Strategy, Datastream, MSCI
One of the takeouts of the above chart is the growth in the technology sector, which has undergone two bull markets in the past decade.
In 2018, the technology and e-commerce sectors accounted for 26 per cent of total market cap (it has fallen to 21 per cent today). Past sector extremes saw tech account for 24 per cent in the 2000 dotcom bubble, financials reached 26 per cent in the 2006 housing bubble and energy & materials got to 24 per cent in the 2008 China/oil bubble.
The market capitalisation of the global equity market
Source: BofA Merrill Lynch Global Investment Strategy, MSCI, Datastream
Looking in even more granularity, the above shows how the market capitalisation of the global equity market is split by region, country and sector.
“US tech is now by far the biggest individual sector in the global stock market at $5.5trn market cap, larger than all emerging market stocks ($5.4trn) and eurozone stocks ($4.4trn) and three times the size of all other tech sectors combined,” BofA ML said.
Financials remain the largest outright global sector at $7.6trn but now only account for 16.7 per cent of global stocks, well below their prior peak of 26.1 per cent in January 2007.
The world's 10 largest companies since 2000
Source: BofA Merrill Lynch Global Investment Strategy, Datastream, MSCI, as of 21 Mar 2019
Accordingly, US tech account for five of the seven largest companies in the world by market capitalisation while seven of the top 10 stocks in the world are tech companies.
Microsoft is the only company to feature in the top 10 stocks throughout the 21st century.
BofA ML’s analysts said that understanding the different sector drivers of country equity indices is a useful starting point for regional equity allocation decisions. These are shown in the below chart.
The sector drivers of equity markets
Source: BofA Merrill Lynch Global Investment Strategy, MSCI, Datastream
The analysts pointed out that the dominance of tech within the US markets means the US has outperformed during macro conditions favourable to growth stocks, such as low rates and low earnings.
Eurozone equities, meanwhile, are highly cyclical and disproportionately reliant on financials, notably Italy and Spain. “The eurozone's next structural bull market awaits the end of the current era of negative interest rates,” they added.
When it comes to emerging markets, the financial sector is the main driver, which is a major change from 2008 when energy and resources were the most important factor. As a result, the catalyst for emerging markets to outperform has moved from commodity prices to global interest rates.
Japan, like Korea, Germany and France, is driven by global cyclical sectors such as industrials and consumer discretionary. Japan outperforms when the global business cycle improves and bond yields rise.
Finally, the UK, Canada and Australia have substantial resources sectors – making rising commodity prices and a weak dollar key drivers for their equity indices.
Equity index % from all-time high
Source: BofA Merrill Lynch Global Investment Strategy, Datastream, MSCI, as of 22 Mar 2019
Above we can see how far equities are from their all-time highs in US dollar terms (green = <5 per cent from high, white = 5-20 per cent from high, red = >20 per cent from high).
A decade into the bull market, only 9 per cent of indices are within 5 per cent of all-time highs, 24 per cent are within 20 per cent and a 67 per cent in ‘bear markets’, or more than 20 per cent away from highs.
The US equity market is just 3 per cent under its all-time high, which sits in stark contrast to Japan (27 per cent from high), the eurozone (33 per cent), China (40 per cent), Spain (52 per cent) and Italy (62 per cent).
“Of particular note, eurozone banks are still 67 per cent off their all-time highs, Korean industrials 75 per cent, Italian financials 82 per cent [and] South African materials 81 per cent,” BofA ML added.
Oversold & overbought equities in 2019
Source: BofA Merrill Lynch Global Investment Strategy, MSCI, Datastream
This year has started with a rally from the challenging conditions seen at the end of 2018 but the above chart shows how far equity countries and sectors are currently trading from their 200-day moving average.
The most overbought are UK tech, Brazilian energy, REITs and utilities, and Hong Kong financials while the most oversold have been South African discretionary, Mexican and Indian communications, German consumer staples and French REITs.
Dividend yield (%)
Source: BofA Merrill Lynch Global Investment Strategy, MSCI, Datastream
Global equities currently yield 2.5 per cent but the above chart offers some more detail in terms of geography and sector.
BofA ML’s analysts noted that dividend yields in excess of 3.5 per cent (suggesting areas that appear cheap) can be found in Russia, Australia, UK, Spain, Italy, Taiwan, energy, utilities and REITs.
Meanwhile, areas yielding less than 2 per cent (highlighting expensive parts of the market) include the US, India, tech, consumer discretionary and communications.
Country & sector price to earnings ratios
Source: BofA Merrill Lynch Global Investment Strategy, IBES
Finally, BofA ML’s research examined the price/earnings ratios based on 12-month forward earnings of various countries and sectors. Global equities are currently trading on a forward P/E multiple of 15x.
P/E multiples above 17x (expensive) can be seen in India, the US, REITs, consumer staples, tech and healthcare while multiples below 12x (cheap) are in Russia, Korea, Italy, Brazil, Spain, China and financials.