Half of companies in the MSCI World Index are now in a bear market.
The story at the start of this year for global markets was one of cautious optimism. Yes, some investment commentators and analysts warned that the end of the bull market was nigh and valuations in some corners looked stretched. But, the majority at the beginning of 2018 said that global growth was still strong, with “synchronised global growth” becoming everyone’s favourite phrase.
With the benefit of hindsight, we now know that did not happen. A slowdown in China and the country’s trade war with the US have weighed heavily on emerging markets, which entered a bear market this year, having fallen 20% peak to trough.
Advanced economies, however, have fared only slightly better, as measured by the MSCI World Index – an index composed of advanced economies such as the US, Japan, the UK, France and Canada.
As the chart below from Societe Generale shows, 52% of companies included in the MSCI are now down by over 20% since their 52-week high. Essentially, half the companies on the index are now in a bear market. (Figures taken from a Societe Generale paper published on 10 December 2018.)
The 52% of companies in bear market territory do represent a smaller part of the overall index – in total they account for just 38% of the market cap of the MSCI World Index.
But that doesn’t mean that the broader index has performed well over the past year. As Societe Generale points out, the MSCI World Index is 12.6% down from its late January peak. At the same time, the index’s year-to-date total return is -4.9%, compared to its five-year annualised positive return of 5.7%.
However the relative poor performance of smaller companies within the index can be shown by comparing total return of MSCI World on a market-cap weighted basis to the MSCI World Equal Weighted index: the latter provided nearly double the losses of the former, with year-to-date returns standing at 8.3%.
The reasoning behind the index’s poor performance are, as ever, numerous. This year, US equities have fallen on the back of fears over a hawkish Federal Reserve. More recently, fears that the US economy will cool next year and could be heading for a recession have emerged. Meanwhile, European stocks have lagged on the back of poor growth data and exposure to the US/China trade war and the UK has had its own unique set of problems.