Global money supply is currently growing at the fastest pace since the crisis year of 2008. The current year-on-year growth rate is 20%.
Given that major global stock indices have been fairly closely correlated with the global money supply since the global financial crisis, we should not be surprised that stock markets continue to grow very strongly this year. The broadest global stock index MSCI All Country World has attributed a highly above-average gain of 6% since the beginning of the year. At the same time, emerging markets are doing particularly well, attributing a profit of as much as 12% to the MSCI Emerging Markets index.
What will be the development of the stock markets in the coming months? My outlook is slightly negative. First, stock market performance in recent months, despite the global pandemic, has been truly phenomenal. MSCI All Country World index has gained 18% in the last 12 months. At the same time, historically in the financial markets, after a period of strong growth, there is usually a period of yield fast.
Second, the valuation of global stock markets is enormously high, close to historical highs. For example, the global P/E trailing is currently 33.7, well above the long-term average of 20.3. From a historical comparison, high equity valuations are strongly correlated with below-average expected and future realized returns.
Third, global inflationary pressures are currently at multi-year highs, as measured by inflation swaps. Therefore, I cannot rule out that realized inflation will also rise significantly above the central banks' inflation targets in the coming months. After all, the quantitative easing aka money printing of key central banks is still unprecedented and fiscal policies remain very loose.
Therefore, my baseline scenario for the future assumes that the major stock indices will move around current levels in the coming months, and I would not be surprised if we saw a slight profit-taking and a healthy correction of around 10-15%.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.