Stocktake: How sustainable are global pandemic market gains?

At the end of December 2020, most people couldn’t pick out Wuhan on a map, notes DataTrek Research. Today, only vaccinated people can eat indoors in New York, but global stocks have nevertheless gained over 30 per cent over the past 20 months.

It sounds odd. Has every region partied, or do some gains look more unsustainable than others?

The global gains equate to a compounded annual growth rate of 19.6 per cent, notes DataTrek – roughly twice as high as average annual growth rates over the past 10 years. The US has led the way, with the S&P 500 gaining 38.6 per cent compared with just 15.5 per cent for the MSCI EAFE index of non-US developed economies.

That might suggest the US rally explains the MSCI All-World index’s exceptional performance, but the reality is that every geographic region has been running at about twice their longer-term returns over the past 20 months.

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Since January 2020, the S&P 500’s annualised growth rate has been 24.6 per cent – that’s 1.7 times its 10-year average of 14.5 per cent. Non-US developed economies have returned 10.3 per cent annually, or 1.8 times their 10-year average of 5.8 per cent. Emerging markets have returned 8.1 per cent annually, or 2.2 times their 10-year average of 3.7 per cent.

Which region is most likely to have generated unsustainable returns over the past 20 months? Emerging markets, says DataTrek, on the basis that EM indices are dominated by China, where authorities have taken a decidedly investor-unfriendly attitude of late.

The US may look extended, but it has earned its gains, argues DataTrek, whereas underperforming emerging markets may be at risk of further underperformance.