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        Weekly ETF Brief

        Global Equities: The History and the Outlook

        Global equities have evolved since the Global Financial Crisis (GFC), reflecting changes in the real economy and secular trends around the world.

        7 min read
        Krzysztof Janiga, CFA
        Senior Equity ETF Strategist

        The stock market, once dominated by Financial and Energy companies, gave way to Technology stocks, allowing investors to benefit from growth and innovation in this segment. The direction of that move was not certain and the path going forward is not set in stone. As such, long-term investors seek diversified, comprehensive equity exposure that can allow them to reap the benefits of future shifts in the global economy. And while valuations are relatively expensive and geopolitical risks remain acute, the combination of expected earnings growth, a dovish turn from central banks, and a rebound in global economic activity provides a supportive backdrop for global equities going forward.   

        Recent History

        Since the end of 2007, equity markets have faced multiple shocks including the GFC, COVID-19, and an inflation spike followed by aggressive monetary tightening. Yet, over the long term, the MSCI ACWI IMI Index outperformed both bonds and commodities by a wide margin, being able not only to prosper when the backdrop was supportive, but also rebound quite rapidly from market lows. Over the last year and a half, equities provided much better protection than bonds as inflation stickiness — not a growth slowdown — became the main threat.

        Figure 1: Cumulative Performance Since 31 December 2002

        Figure 1 shows performance over the last 20+ years for global equities, bonds, and commodities, showing a large divergence in performance as global equities have increased significantly.

        Patience Is a Virtue 

        Equities are often volatile and, as such, investors may suffer drawdowns if their investment horizon is short. Longer-term investing, however, historically has allowed investors to recover losses, typically within a year. The exception to this was the GFC when markets recouped a majority of the losses in two years’ time, but took until 2013 to fully recover. The 2022 losses, driven by the geopolitical storm, an inflation spike, and aggressive monetary tightening, were nearly fully recouped within one year. 

        Figure 2: Annualized Performance Over Various Time Horizons (%)

        Figure 2 shows full-year performance for the MSCI ACWI IMI Index for the last 20 years.

        The Success of the US and the Decline of Europe

        The innovativeness of US-domiciled companies has allowed them to dominate the global equity market even further, increasing its weight in the index from 43% pre-GFC to 62% as of 31 May 2024. Meanwhile, Europe, the UK, and Japan have lost ground, reflecting more sluggish growth in those economies. The global equity market is heavily skewed to the US. Yet looking at the regional revenue breakdown of companies within the MSCI ACWI IMI Index, the concentration is less pronounced, with 44% of its revenue generated in the US and 17% each from EM Asia and Europe including the UK.1 From that standpoint, global equities remain relatively well diversified and able to benefit from a potential broadening of market performance which may be appealing in the context of rebounding PMIs.

        Figure 3: MSCI ACWI IMI Index Breakdown by Region

        Figure 3 shows the regional makeup of the MSCI ACWI IMI over the last 15 years. The USA has increased its weight over time while most other regions have decreased.

        Reflecting Secular Trends

        Before the GFC, the largest sectors in the equity market were Financials (at 22% of the MSCI ACWI IMI Index) and Energy (11%).2 However, the importance of both sectors has gradually shrunk over the last decade. Financials and Energy now account for 15% and less than 5% of the index, respectively.3

        Meanwhile the rise of technology companies in the US and beyond has been one of the key performance drivers for global equities and is reflected in the current sector mix. While Microsoft, Apple, and to a lesser extent NVIDIA were already champions in their respective fields in 2007, the weight of these three companies in the index has grown from 1.3% before the GFC to 10.4% at the end of 2023.4 Increased concentration is another notable trend, with the top 10 stocks accounting for 18.4% of the market cap of the index, versus just 7.3% at the end of 2007.5 More importantly, the largest companies are heavily skewed toward technology or technology-related sectors. The promise of AI will need to materialize as earnings growth over the next decade. Meanwhile, unloved parts of the market do not have a high bar of expectations to exceed and, as such, have the chance to surprise to the upside — especially if economies continue to exhibit resilience through a higher rates environment.

        Figure 4: MSCI ACWI IMI Index Breakdown by Sector

        Figure 4 shows the MSCI ACWI IMI Index's sector makeup over the last 15 years.

        The Outlook

        Global Economy Is Accelerating Not Slowing

        In our view, the investment environment remains supportive for equities as recession fears have faded and economic activity is accelerating, with manufacturing PMI now also in the expansion zone. A rebound in that segment is crucial as it sets a base for broadening of both earnings growth and stock performance. Real GDP growth expectations (consensus) are at 3.0% - 3.1%6 over the next three years. These levels should support top-line revenue growth for global equities. 

        The picture is not all rosy, however, and there are risks to the outlook. Assuming a mid- to long-term investment horizon, the key risks are excessive fiscal deficits and uncertainty around the geopolitical outlook which may lead to further economic fragmentation. 

        Soft Landing Unfolding

        Inflation around the world has been falling at a slower rate than market participants had expected, with the latest setback observed in Q1. However, recent CPI prints were by and large encouraging and implied that price growth continues to moderate. The Federal Reserve is by far the most important central bank to watch and while it is still quite hawkish in its rhetoric, rate cuts should start later in 2024, providing breathing room for risky assets. To be sure, rates will stay in restrictive territory for some time, but the US economy and its labour market remain resilient and are cooling gently and slowly enough to allow for a soft landing. 

        Outside the US, central banks including the ECB, SNB, Riksbank, and the Bank of Canada have already begun the easing cycle. If disinflation continues, both equities and fixed income instruments are likely to benefit. Setbacks in the inflation backdrop, especially if demand driven, would be much less of a headwind for stocks than for bonds; we saw such a setback in the first quarter of 2024.

        Valuations Are Expensive but Not Extreme

        As equity markets have rallied since the end of October 2023, price-to-earnings multiples expanded to 17.6x which is above the long-term average. This level, while elevated, is not necessarily extreme — and may be justified, as long as the soft landing scenario continues to unfold, the global economy does not leave the expansion path, AI delivers over the long term, and earnings growth meets sell-side expectations.

        Robust Earnings and Robust Growth Prospects 

        So far this year, equities have enjoyed robust earnings, with the S&P 500® Index beating earnings-per-share (EPS) expectations by 8% in Q1, the Stoxx 600 Index by 8.7%, and the Nikkei 225 by a less exciting but still positive 2%.7 Strong earnings and in some areas bullish guidance was the key element behind the equities rally, especially in the beginning of the year. Going forward, sell-side analysts are pointing to 10-13% EPS growth over the next three years. These levels may be achieved and exceeded on the back of a combination of global recovery, monetary easing, and secular trends — namely AI.

        How to Access Global Equities

        Global Developed and Emerging Large-, Mid-, and Small-cap Equities

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