In the eyes of many (us included), two themes in global equity markets have become overstretched and long in the tooth so to speak. Firstly, the US has significantly outperformed all regional markets since 2011, driven in no small part by companies buying their own shares back (my colleague Jo Baynham has previously written on this subject – ‘Unintentional Consequences’ February 19, 2016). Secondly, much unloved Emerging Markets (EM) have underperformed so badly over this 5-year time frame that valuations are cheap and value investors are starting to get interested.
The Bloomberg chart (Fig:1) shows this massive divergence between the S&P500 and MSCI EM Total Return Indices since Sept 2011 – while the value of an investment in US equities has basically doubled in US Dollar terms, an equivalent sum deployed in EM equity has lost money. This helps to explain why many global equity managers have underperformed their benchmark on 3 and 5 year numbers: unless fully- or over-weighted in the US and within that exposed to both the Healthcare sector and FANG stocks (Facebook, Amazon, Netflix and Google), they were ‘toast’. A strong US Dollar has also contributed.
Contrasting with this long-term picture however, during the first quarter of this year, the MSCI EM index was up 5.71% in US Dollar terms, whilst the All Country World Index was flat and the S&P500 up only 1.3%. A sea change, perhaps? Having spent last week in Singapore and Malaysia on business, it is easy to see in the press and from within the industry that South East Asia in particular is struggling with the effects of a slower Chinese economy on its equity and property markets. Nevertheless, the sheer scale of the emerging consumer is a long-term story that is not going away anytime soon in our view.
The other side of the story is the powerhouse US equity outperformance. The HSBC chart (Fig:2), shows the total demands for shares in US corporates since 2008. While there is no doubt that share prices have been lifted by the rising tide of central bank liquidity, companies’ share buybacks account for the vast majority of net buyers on the NYSE. Not only is this unsustainable, we reiterate that this is a pretty sad indictment of a company’s growth opportunities when the board considers the best use of capital is to buy back its own shares in such volume. A weaker US Dollar will help US companies, but there are better opportunities elsewhere at present.
US Buy-Backs and Emerging Markets vs. Developed Markets