In the table below, we show the percent of companies from each country that are outperforming the MSCI World Index. While 62% of Hong Kong, US and Danish companies are outperforming, only 7% of the companies in Germany and Sweden are outperforming.
What is causing such a divergent performance among the developed world countries? The simple answer is the rising US Dollar. Since July 2011, when the USD made a low and began a new structural bull market, stock market performance has largely been a function of the oscillations of the USD. To punctuate the narrowness of leadership in the global equity markets, we created a diffusion index to measure the number of countries outperforming the MSCI World index over various time periods. Only 2 countries--the US and Denmark--have outperformed the MSCI World index over the last five years. Only four countries have outperformed over the last three years. Needless to say, stock picking in a globally diversified portfolio has been difficult.
In the chart below we show the 100 day moving average of the advance/decline ratio of the MSCI World Index. Stock market breadth peaked four months after the USD troughed and each wave of USD strength has led to another wave of narrowing stock market breadth. No surprise that new highs in the USD are occurring alongside new lows in the advance/decline ratio.
Another way to think about the narrowing of stock market leadership is to break companies into two basic categories--cyclicals and non-cyclicals. Over the last 15 years, the movement of the USD has largely dictated which group outperforms. In the years of the USD bear market, cyclical stocks handily outperformed cyclicals. Since testing 2008 lows in 2011, the USD has been rising and has been accompanied by non-cyclicals outperforming.
Since non-cyclicals represent only about 25% of the companies in the MSCI World Index, when non-cyclicals are outperforming, it stands to reason that breadth statistics are weak. In a strong USD environment, North American non-cyclicals are the place to be.