The world’s major equity markets based on global stock market capitalization have tripled in size, in two decades, climbing to $109 trillion in total market capitalization.
Expansive growth of the global money supply has been the catalyst of Global stock market capitalization X3 over the past few decades
There is a correlation between global money supply and global debt, which reached a record 225 trillion dollars in 2021.
Global stock market capitalization rode the money supply wave in the early 20s. Asset prices across the risk asset spectrum all hit all-time highs as global money supply peaked during the pandemic global lockdowns.
The driveshaft moving global stock market capitalization prices higher is global central bank liquidity
Fundamental economics has had little, or no influence on asset prices over the past decade.
The global lockdowns revealed the driver of financial asset prices is central bank liquidity, not the economy.
If fundamentals impact asset prices, global stock market capitalization should have collapsed in the global lockdowns, bearing in mind the economy was closed, businesses forced to shut down, and the supply chains disrupted.
The bull market in stocks peaked with peak central bank liquidity.
Central Bank Liquidity Cycle and Global Stock Market Capitalization
Central banks coordinate monetary policy. So if the Fed wants to tighten liquidity, its Western-aligned sidekick central banks, ECB, BOE, and BOJ, will all tag along. The coordination of monetary policy between central banks creates a global Central bank liquidity cycle, which impacts the global stock market capitalization.
So when central banks tighten liquidity, global asset prices tend to fall and vice versa.
The current mainstream narrative for the recent stock recovery is in the wake of aggressive Fed rate hikes in 2023, inflation is now tame, and central banks are done tightening monetary policy.
After several consecutive Fed rate pauses, what typically follows is a rate cut.
So, while long-maturity treasury yields are dropping, investors are betting that central bank liquidity has reached a trough in the Central bank liquidity cycle. The best time to buy assets is at its lowest price when central banks pivot from tightening to easing. Darren Winters says he would not be surprised to see a wave of buying as billions of dollars on the sideline get put to work in the stock market.
Dividend-paying stocks could be a better bet than bonds, bearing in mind when central banks increase the money supply, they debase the currency. But because central banks operate in cahoots, all currencies tend to fall together. So, the depreciation of currencies is hidden, and the only thing visible is the ongoing collapsing living standards of a dwindling middle class.
Countries with the highest global market capitalization
The US makes up 42.5% of global equity market capitalization and is the world’s major equity market based on global market capitalization.
Today, US equity markets total over $46.2 trillion in market capitalization.
Compared to other rich nations, US stocks have often outperformed over the last several decades. If an investor put $100 in the S&P 500 in 1990, this investment would have grown to about $2,000 in 2023, or a four-fold return, achieved in other developed countries.
But waiting three decades to grow 100 into 2000 would only be suitable for people below 45 years, and they would have to be willing to ride the ghost train, dotcom crash, 2008 financial crisis and 2020 pandemic global lockdowns. Money printing to the rescue, so how much of those profits have been lost to inflation? Still, for those with a long investor timeline, and willing to tolerate risk, 30 years invested in stocks performed better than bonds.
The European Union comes a distant second with 11.1% of the global share, followed by China, at 10.6%.
China’s growth story over the last 20 years is one of miracles. China’s economy has increased by approximately 12-fold, reaching $19.4 trillion in 2023. China’s equity markets have also boomed, fueled by the incorporation of Chinese domestic stocks into the MSCI Emerging Market Index in 2018 and earlier, with the internationalization of its equity markets in 2002.
Japan’s equity markets account for 5.4% of the global share, followed by Hong Kong at 4%.
How will countries share in global stock market capitalization change?
The rise of BRICS is projected to grow further, with China and India tipped as the two largest economies within a decade.
The US equity market capitalization is forecasted to be 35%, a decline of 7%, of the overall global market by 2030, according to Goldman Sachs.
The future could be the story of emerging markets, including China and India, which are forecast to reach 35% during the same period. By 2050, the EM share is forecast to surpass the US, rising to 47% of global stock markets.
The first factor underscoring this shift is the rapid growth projected for emerging economies.
Historically, as GDP per capita grows, capital markets in developed economies become more sophisticated. So richer countries tend to have higher equitization of their markets.
India is forecast to rise the fastest globally. By 2030, it is forecast to account for 4.1% of the global equity market cap. Furthermore, by 2050, this share is projected to outrank the euro area due to strong GDP per capita growth and demographic drivers.
The second factor, although to a lesser extent, is emerging market rising valuation multiples driven by higher GDP per capita. Richer countries, as seen in the US, often trade at higher earnings multiples because they are perceived to have a lower risk.
What are the implications of regional changes to global stock market capitalization?
The outperformance of US stocks may not be so going forward.
Geographical diversification may be wise as tomorrow’s growth stores may not be in developed economies.
Perhaps this is another story that indicates the decline of developed economies and the rise of developing economies.