By: Despite strong returns over the last 12 months, investors lack optimism

Following a strong rally during the first half of the year, the past few months have been characterised by global equity markets retreating from their recent highs. In fact, the MSCI World Index ended October 10.4% lower than its July peak, technically placing the index in correction territory.

Yet, despite the recent declines, returns across equity markets since October last year, when the market bottomed, remain impressive. This is perhaps surprising, given all that has transpired over the ensuing period.

The leaders and laggards

From October 12, 2022 to October 31, 2023, the MSCI World Index returned around 20% in US dollars and slightly more in rand. Interestingly, Europe (+27%) and Japan (+20%) were the standout regional performers over the period, while the US marginally underperformed the broader index, despite the Magnificent Seven’s (that is Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) stellar performance.

You may recall that in October last year, Europe’s supposed recession – on the back of surging energy prices following Russia’s invasion of Ukraine – was imminent and dominated news headlines.

At the time, the UK was embroiled in a messy political circus that led to the shortest-serving prime minister in the country’s history. And yet, just one year later, most regions have produced strong returns in US dollars, with Europe leading the rally. This serves as another reminder of the risk (and folly) of being too focused on and swayed by news headlines.

While last year’s concerns around Europe and the UK have largely vanished, other concerns persist, and new ones have emerged.

Interest rate increases by global central banks remain front and centre of investors’ minds, along with sticky inflation, high oil prices, and geopolitical uncertainty.

On the ever-present market wall of worry, investors have since added the US’s deteriorating fiscal position amid higher interest rates, along with China’s slow pace of recovery. And as is the case with the wall of worry, the list of concerns seems to grow longer with each passing month. Legendary investor Peter Lynch once remarked that “far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” Over the last year, this has certainly rung true.

Market cap divergence

A notable trend we have seen in markets this year has been that of a few large shares leading the market. The Magnificent Seven’s strong performance is well-known, with these companies largely driving US equity market returns this year. For the year to date, the S&P 500 (which includes all seven companies) is up 10.7%, with the Magnificent Seven contributing around 90% of this return.

Over the same period, the equally weighted S&P 500 declined by 4.1%. In other words, despite the respectable year-to-date return in the S&P 500 Index, the average S&P 500 company has produced a negative return for the year-to-date.

The trend is not entirely unique to the US. In the UK and the broader European equity markets, large-cap indices (Euro Stoxx 50 and FTSE 100) have outperformed their midsized peers, as shown in Graph 2. Perhaps this explains why, despite the strong returns over the past 12 months, there is no overwhelming sense of optimism among most investors.

While not to the same extent, the South African equity market somewhat followed a similar trend, where larger-cap indices have outperformed. For example, the JSE FTSE TOP 40 index and the broader All Share Index have both declined by 1.3% to the end of October, while the mid-cap index has fallen by 3.4%. Given that local investors have had to contend with operating in a concentrated market for much of the last decade (thanks to Naspers and Prosus) this trend of market cap divergence across the different markets will likely be unsettling. A broader market rally is generally regarded as more reflective of a positive economic backdrop and as such, will likely remain in focus.

* Victor Mupunga is the head of research at Private Clients.

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