The global equity and bond universe has expanded by more than $40trn since central banks started to pump liquidity into the system to shore up the global economy while fund managers across the world view surging tech stocks as the market’s most crowded trade.
These are two of the findings in a new Bank of America Merrill Lynch report – Global Investment Strategy: The Hitchhiker’s Guide to the Investment Universe – which reviews how the market has evolved in recent decades.
In the following article, FE Trustnet highlights a number of findings from this research, including how global financial assets have hit an all-time high, the level of dividend yield available across the globe and the evolution of the big worries that keep fund managers up at night.
The $180trn bond & equity universe
Source: BofA Merrill Lynch Global Investment Strategy, World Federation of Exchanges, BIS
The above chart shows the combined amount of money in global equities and outstanding debt securities, measured in trillions of US dollars. BofA ML said that global financial assets are now worth more than $180trn, or 226 per cent of global GDP.
This is an all-time high after global financial assets totalled $23trn in 1990, $64trn in 2000 and $139trn in 2010.
Within this, the universe of global equities amounted to $81trn by the end of 2017. When it comes to fixed income, the universe of global debt securities was worth $100trn by the end of last year, up from $13tn in 1990, $33tn in 2000 and $84tn in 2010.
The US dominates both bond & equity markets
Source: BofA Merrill Lynch Global Investment Strategy, Datastream
The US market is the largest when it comes to both fixed income and equities. BofA ML said it should come as “no surprise” that this is the case, given the sheer size of the US as the world’s largest economy.
The country accounts for 53 per cent of the MSCI AC World index, with a market cap of $24.9trn. According to the bank, other notable episodes of regional dominance include Japan’s 52 per cent weighting in the world equity index in 1989 and Europe’s 35 per cent in 1998
Looking at government-issued debt securities shows that the US is dominant here too. The US Treasury market is the largest debt market in the world with $17.6trn of securities, or 37 per cent of the total; the top five is completed by Japan, China, Italy and the UK.
FAAMG+BAT bigger than eurozone and EM & Japan
Source: BofA Merrill Lynch Global Investment Strategy, Datastream, MSCI
BofA ML’s report also highlights how dominant tech has become in today’s markets. The US technology sector has a market cap of $6.6bn, making up more than one-quarter of the US index and cementing its position as the largest sector in global equity markets.
Furthermore, the tech-focused FAAMG+BAT stocks of Facebook, Apple, Amazon, Microsoft and Google plus emerging market companies Baidu, Alibaba and Tencent have grown into behemoths.
The chart above shows how the eight FAAMG+BAT stocks are larger than the market cap of every listed company in the eurozone, in emerging markets (excluding the BAT names) and in Japan.
Cross-asset returns since 2000
Source: BofA Merrill Lynch Global Investment Strategy, Bloomberg. *YTD annualised returns
The above ‘quilt of total returns’ shows the global cross-asset total returns, in US dollar terms, over the past 17 full calendar years and 2018 so far.
BofA ML pointed out that annualised risk asset returns have been particularly strong since central banks across the globe started to launch quantitative easing (QE) programmes in 2009. US stocks have posted annualised returns of 19 per cent under QE while for global high yield bonds it stands at 12 per cent; in contrast, annualised returns for Treasuries and cash over the same period have been 2 per cent and 0 per cent respectively.
The bank added that the returns made over 2018 so far appear to be ‘late cycle’, with commodities posting their best returns since 2002 but US investment grade bonds seeing their worst since 1974.
Evolution of global FMS biggest ‘tail risks’
Source: BofA Merrill Lynch Global Fund Manager Survey
The closely-watched BofA Merrill Lynch Global Fund Manager Survey – which polls asset allocators across the globe each month for insights into their positioning, strategies and outlooks – includes a regular question on the ‘tail risks’ appear to be the most worrying.
The above chart shows how these tail risks have evolved since 2011, when investors were scared by the eurozone sovereign debt crisis. This was a longstanding concern but eventually it gave way to issues such as the US ‘fiscal cliff’, a hard landing in China and the rise of political populism.
Most recently, however, a potential trade war has emerged as the main risk that fund managers are worrying about. This comes as many fear the China and the US are sitting on the brink of an all-out trade war. Last week the US unveiled a $50bn list of Chinese goods to target with 25 per cent tariffs and China issued its own list of retaliatory tariffs on US imports within hours; recent days have seen signs that this spat could intensify further.
A chronology of crowded trades
Source: BofA Merrill Lynch Global Fund Manager Survey
Another regular feature in the BofA Merrill Lynch Global Fund Manager Survey is a list of what asset allocators consider to be the most crowded trades within global markets.
At the moment, going long FAANG+BAT stocks – which differ slightly from the FAAMG+BAT stocks discussed earlier in that Netflix replaces Microsoft – is the trade that most fund managers this is at risk of being over-popular. This is of little surprise, given that these companies are common holdings among portfolios and have experienced significant growth in recent years.
Other crowded trades include long quality stocks in 2016 (a year when the value style outperformed), short volatility at the start of 2018 (when volatility returned to markets and hurt investors holding these products) and long US dollar – given the strength of that currency for much of the recent past.
Where the dividend yields are
Source: BofA Merrill Lynch Global Investment Strategy, MSCI, Datastream
This table shows dividend yields around the world, broken down by geography and sector. Overall, global equities currently yield 2.4 per cent.
BofA ML said areas with dividend yields in excess of 3.5 per cent can be considered ‘cheap’ in this environment. This suggests areas such as Russia, Australia, Spain, the UK, telecommunications and utilities could be considered undervalued.
On the other hand, dividend yields below 2 per cent can be considered ‘expensive’. This would include parts of the market such as India, China, the US, Korea, technology and consumer discretionary.