Global equities at new heights of exuberance

The total market capitalisation of global equities has surged to a record $77 trillion, more than four times the US GDP of $18.5 trillion. With this, average allocation toward equity has crossed the peak of 42% seen in 2007. This has happened twice before — in the 1960s as a multitude of small investors bought into the growth stocks theory and during the dot-com bubble of the late 1990s.

The rush into equity is being fuelled by the continued accommodative policy of several central banks in developed economies, availability of low-cost equity options such as exchange traded funds (ETFs) and record low volatility of risky assets.

In the past year, the global equity market expanded by $12 trillion, of which nearly a quarter was accounted for by the US, in turn, driven by the nearly 50% return of FANG (Facebook, Amazon, Netflix and Google) and Apple. These stocks added nearly $1 trillion to global equity, nearly half of India’s equity market cap.

Equity is also preferred as nearly $10 trillion of debt instruments (many of them sovereign bonds) are trading at a negative yield due to the stimulus programmes. In addition, daily incremental moves in equity indices are bringing a level of comfort to investors — the Citigroup Global risk aversion index has dropped to levels that prevailed before 2008.

With the advent of mutual funds, ETFs and target date funds, professional investors now hold sway compared with direct stock ownership by promoters and retail investors earlier. Still, what happened in 2007-8 isn’t forgotten. Besides, historically, higher allocations have preceded sharp drops in stocks.

In addition, the forward price-earnings ratio of the MSCI ACWI global equity index has surpassed the 2007 peak of 14.5 to reach 16. Still, the fact that the global market cap-GDP ratio is currently at 89.4% compared with 104% in 2007 may offer comfort.

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