‘M5’ Equity Markets
Chart-01 shows the M5 equal-weight basket of markets and the five national blue-chip indices over the most recent 18 months, rebased. Over this time, Swiss equities have held up best, with British stocks the worst performing market in this universe.
Table-01 gives current index values and those of three years ago, while also indicating current distance from high and low values. Over 36 months, US equities have shown the best performance, with +22%, while those in Great Britain have fallen by nearly as much (-18%). With recent events, the frequency of ‚up’ months during the recent 36 months has come down to normal levels in most markets, but is still fairly high (72%) in the US. All equity markets show monthly rates of change with heavy horizontal distortions from ‚normal’.
Chart-03 illustrates 3-year normalised risk and return, by placing these grid with return (vertical) and risk (horizontal). The dashed diagonal line marks equilibrium between the two. The scatter diagram to the left shows current values, the one on the right refers to one year previous. The change is quite dramatic: in the three years to date, no market has compensated for risk, and four markets cluster around similar risk levels, but with vastly different return. Of this group, US equities have the highest, and positive return while British equities generated a negative return with similar risk. Market selection has been of paramount importance in this cycle.
Chart-03 expands the observation window to ten years. Here, only the national equity markets are plotted, with a base value of 100 at the starting date of the chart. US and Japanese equities tower above the other three markets, with a meaningful gap even between the two. British and European equities, the two laggards, are getting close to their values ten year ago.
While staying with a ten year window, Chart-04 uses 3-year normalised return trails to emphasise differences in market dynamic during this time. Prior to the crisis, (late 2018 to late 2019) the better performers (US & Japan) had been travelling at constant speed, with Swiss and European equities accelerating. Now, normalised returns are rapidly imploding. Whether or not they have turned negative, is mainly a function of the level from which they started this descend.
Chart-05 displays normalised risk (observed risk) exactly as Chart-04 did with return. As an ex-post measure of risk, this is a contrary indicator. For that reason ‚low reading’ are found above high values in the chart. Very low risk indicates excessive optimism, and vice-versa. Most markets had arrived at a phase suggesting blind optimism already during the course of 2018.
Table-02 gives index values at fixed points in time: ten, five, and three years ago, as well as 12 months ago, last year end, and last month end. In the lower portion of the table, rates of return corresponding to these dates are shown. In each time frame, the best (green) and worst (red) performing market is highlighted in colour. Note the prevalence of green in the column for the US market, and red in Britain.
For the equal-weight M5 basket only, Chart-06 plots 120 months of performance in the upper portion. The lower graph displays proportional erosion from peak value.
Table-03 investigates similarities, or differences between national markets in the latest ten years by relating each to the M5 basket. European equities stand out with the poorest combination of sensitivity (beta) and a negative constant (alpha), the opposite of the Swiss market with a low sensitivity and positive constant. The data identifies Swiss equities as a good ‚defensive bet’, and the US and Japanese markets as ‚bull market’ – for the last ten years. It would be surprising, if this pattern were to extend to the next market cycle.
Noteworthy is how equity markets are much more highly correlated (R-squared value) to one another than the bond markets of the same selection of countries.
Chart-07 compares equity markets in their normalised returns since 31.12.1999. One should bear in mind that dynamics within these more than twenty years have not been constant. Even so, the difference between ‚Top’ (US) and ‚Flop’ (Europe) amounted to a massive 5% per annum. The graph vividly illustrates the masking effect of averages and the paramount importance of differentiation.