On an equal weighted basis, the MSCI World index is up 2.58%
YTD, is down 3.39% QTD and down 3.01% MTD.
The equal weight index gives
us a better idea of our chances of picking stocks that outperform.
Performance of MSCI World Sectors
Next let's delve a little deeper in the internals of the market to give some context to the performance of the market in general. To set the table let me show the geographic breakdown of the MSCI World index. Roughly 44% of the 1,610 companies in the MSCI World Index are domiciled in North America, while 27.6% of companies are located in Europe and 28.2% are located in Asia.
Geographic Breakdown
of MSCI World Index
Let’s start with a comparison between the main geographies that comprise the MSCI World index.
North America.
On equal weight basis, North America is up 6.33% YTD, with
the health care sector in the lead.
Performance of MSCI
North America Sectors
When we drill down and look and the percent of companies
outperforming the MSCI World index, we can see that 55% of North American
companies are outperforming YTD, with the highest rates of outperformance in
the defensive utility and health care sectors.
Percent of MSCI North
America Outperforming MSCI World Index
Europe
Performance in Europe has been comparatively worse. On average, European stocks are down 3.05%
YTD, -7.58% QTD and -3.34% MTD. Here
again, health care (and other defensive sectors) have led performance.
Performance of MSCI
Europe Index
Only 34% of companies in Europe have outperformed the MSCI
World index this year, which indicates the odds of picking outperforming stocks
have been quite low.
Percent of Companies
Outperforming MSCI World Index
Asia
The average company in Asia has fared somewhat better than
Europe, but still not close to the performance of North America.
Performance MSCI Asia
The equal weight basket of Asian stocks is only up 2.22% YTD
and is down 2.5% QTD and- 2.88% MTD.
Once again defensive sectors have led, with health care the second best
performing sector. Less than half of the companies in the MSCI Asia index have
outperformed this year.
Percent Outperforming
MSCI World Index
Next let me add some detail to illustrate the tumult
underneath the surface of the market. A bear
market is traditionally defined as down 20% from highs. In the table below, I break out the
performance of all stocks in the MSCI world index by grouping.
Performance of MSCI
World index By Group
Nearly 18% of the stocks in the MSCI World index are down
more than 20% over their one year highs.
A further 33% of stocks are down between 10-20%. So, 51% of all stocks in the MSCI World index
are down at least 10% from one year highs.
Performance of MSCI
Europe Index By Group
29% of European stocks are down more than 20% from one year
highs, and 68% of European stocks are down more than 10% from one year
highs. The odds of picking a loser have
been high in Europe.
Performance of MSCI
Asia Index by Group
18% of Asian stocks are down more than 20% from one year
highs and an additional 40% are down 10-20% from one year highs. So, 58% of all Asian stocks are down more
than 10% from one year highs.
Performance of MSCI
North America By Group
By contrast, only 11% of North American companies are down
more than 20% and 65% of all North American companies are down less than 10%
from one year highs.
Below are some charts that reinforce the point that the bull
market of the last few years has been exclusively an American phenomenon. While North America has outperformed (on a
market cap weighted basis) by 20% over the last five years, Europe has
underperformed by 20% and Asia by 25%.
Additionally, on a country basis, only the US and Denmark
have outperformed over the last five years.
That’s only 2 out of 24 countries that have outperformed the MSCI World
Index.
For comparison, many major countries have had fairly dismal
performance. For example, Japan, Germany
and the UK have all underperformed significantly over the last five years.
From still another perspective, let me demonstrate the
difficulty in stock picking over the last few years. Roughly 75% of the MSCI World Index is
cyclicals—companies in the consumer discretionary, financial, technology,
energy, materials and industrial sectors.
Given all the fiscal/monetary stimulus of the last few years, one sure
would have thought these cyclical areas would have outperformed. That would would have been incorrect. In the chart below I show the relative
performance of all cyclicals in the MSCI World index.
So, roughly 75% of the companies in the MSCI World index
have underperformed by 10% over the last four years. This means only 25% of the stocks in the MSCI
World Index have driven the performance of the whole index. Leadership in the global equity market has
been quite narrow, with cyclicals underperforming.
A very narrow slice of the global, developed equity markets
have been in a bull market. North
American health care, which represents only 9.2% of the MSCI World index, and
North American consumer discretionary, which is 15.8% of the MSCI World Index
have carried performance over the last five years for the whole MSCI World
index.
Global equity market performance has been a bit of an
optical illusion the last few years, with the vast majority of stocks
underperforming the index, and those that did outperform tended to be
counter-cyclical. Every day we see more
evidence that even the bull market in the US is getting riskier and
riskier. Recent evidence includes fewer
sectors outperforming, high yield spreads widening, small cap stocks negative
on the year, flattening yield curve, etc.