Global stock barometer a whisker away from record peak

Global large-and-mid capitalisation stocks have climbed to within easy striking distance of setting a new all-time high for the first time in almost two years, led by a strong performance by US equities.

The MSCI all-world index, which tracks companies in 46 countries that account for 85 per cent of the investable equities market, closed on Monday at 441.14, just 0.35 per cent away from the all-time high it struck in May 2015.

The gauge has climbed by 23.5 per cent over the past 12 months, partly reflecting a sharp rebound from a fall at the start of last year.

Brightening outlook

Equity bourses around the world have been lifted by a brightening outlook for the world economy, along with a recovery in the price of oil.

World Bank economists reckon global growth will accelerate from 2.3 per cent in 2016, to 2.7 per cent this year, and 2.9 per cent the next year. The optimism has come as central banks in Europe and Asia have loosened monetary policy in a bid to spur faster growth.

In the US, the Federal Reserve has pledged to only “gradually” tighten policy. Some economists have also marked-up their estimates for the rate of expansion for the world’s biggest developed economy on expectations that Donald Trump and a Republican Congress will roll-out business-friendly policies.

Bourses in the US, which account for the largest share of global market value, have charged higher since Mr Trump’s election last year, with the S&P 500, Wall Street’s benchmark index, notching a new high on Tuesday and the Dow breaching the 20,000 level earlier this year.

“The move above 20,000 by the Dow wasn’t the catalyst some hoped it would be, and the sideways movement in equities continues,” Lizz Ann Sonders, chief investment strategist at Charles Schwab, said. However, she notes that the bull-bear ratio in the closely watched the Ned Davis Research daily trading sentiment composite and the AAII investor sentiment survey has “pulled back from overly optimistic territory, which should be a positive development for the continuation of the bull market”.

Excluding the US, the index remains close to 30 per cent shy of its record peak.

Canadian stocks at record highs

But some bourses outside the US have been propelled to new highs as well. Toronto Stock Exchange’s S&P/TSX composite index touched a fresh record high on Monday and is up 3 per cent so far this year, on top of a near 18 per cent gain last year.

A rally in crude prices and a higher interest rate environment helped the Canadian benchmark index outperform its US counterpart last year, by bolstering financials, energy and materials — the heaviest weighted sectors on the index.

Brazil and Mexico in surprise rise

Among the more unlikely participants in the current global stock rally have been Brazil and Mexico.

After ending last year 39 per cent higher, Brazil’s Bovespa stock index has continued to defy gravity. It has tacked on nearly 11 per cent so far this year to hit a near five year high of 67,093.64 on Monday.

That puts the index about 9 per cent away from the gauge’s all time record of 73,920.38 – which was struck during the peak of the country’s commodities supercycle boom.

Meanwhile, Mexico’s IPC index has climbed 4 per cent since the start of the year. Despite Mr Trump’s tough stance on trade and immigration, Mexican stocks have managed to claw back the bulk of their post-election sell-off and are trading at less than 3 per cent below their all-time highs.

In the case of Brazil, the strength of the rally has been all the remarkable given the still fragile state of Latin America’s largest economy. While stabilising commodity prices, government reforms, an easing of inflationary pressures, coupled with the Brazilian central bank’s move to start cutting interest rates, have all contributed to a rise in business confidence in recent months – the country remains mired in its worst recession in over a century.

But with the Bovespa trading at a heady 240 times earnings, Peter Donisanu, investment strategy analyst at Wells Fargo Investment Institute, argues that the rally is now basically running on fumes.

“We believe that valuations of Latin American stocks are disconnected from fundamentals as equity prices have moved ahead of themselves in the expectation of an economic rebound that has yet to materialize,” he said.

“As a result, we expect these markets to be susceptible to a reversal; therefore, we maintain our unfavorable equity rating on the Latin American region.”