Recently the global market capitalization of all listed stocks across the world touched a high of $72 trillion. Interestingly, the world market cap had touched a high of $67 trillion way back in 2007 at the peak of the global equity boom. When the sub-prime crisis struck and later Lehman went bust the global contagion led to global market cap melting down to a level of $35 trillion. Effectively, from the beginning of the quantitative easing (QE) back in 2008, the global market cap has exactly doubled. But what is interesting is that the pattern of market cap gains has undergone a subtle shift. Let us look at the market cap in two perspectives; a 3-year shift and a 14-year shift. The 3-year shift is important as it coincides with the sharp fall in oil prices and it is the economics of oil and commodities that has driven the market cap shift since then. The 14-year shift is important because year 2003 marked the bottom of the commodity super-cycle. It also formed the base from where global markets went into one of the biggest global bull markets in history.
Let us look at a 3-year comparison first…
Between 2014 and 2017, the major gains in market cap came from US, China, India, Hong Kong and Japan. The table below captures the shift in market share of these five countries between 2014 and 2017…
Share of World Market Cap – 2014 (%)
Share of World Market Cap – 2017 (%)
Data Source: Bloomberg
As the above table indicates, the China has been one of the biggest gainers in terms of share of global market capitalization. India has been another market that has gained substantially in terms of share of global market cap. So, what exactly is common among all these five nations? The answer is that all are net importers of oil. Since late November 2014, we have seen the price of oil falling from a high of $115/bbl to a low of $30/bbl in early 2016 before settling around the range of $55/bbl. This has led to trillions of dollars in wealth being transferred from oil producers to oil consumers. All the above five nations are predominantly oil consumers and this transfer of wealth has shown up in the form of higher share of global market cap.
To be fair, it is not just about oil. Each of these nations also has a country-specific story going in its favour. For example, Japan is benefiting from a weak Yen. Coupled with its easy liquidity policy, Japan has managed to give a boost to its exports with the help of a cheap currency. This has buoyed Japanese market cap and made it one of the key gainers over the last 3 years. The US has seen the return of growth expectation under Trump and the Dow and the NASDAQ have scaled new highs. Also the proposed tax cuts and the $1 trillion infrastructure investment plan have also buoyed US equities. China is seeing a revival in spending and the GDP is still growing at 6.5%, which is keeping the markets buoyant. India’s case is slightly more complex. Apart from the best growth among large economies, India is also having the benefit of a de-coupled growth model.
The losers in market cap over the last 3 years are the usual suspects. Countries like Brazil, Australia and Russia have seen their share of market cap drop sharply. Being predominantly oil and commodity driven economies, they have been hit by fall in commodity prices as well as their currencies weakening sharply against the US Dollar.
How have global markets shaped up since the beginning of the bull market in 2003…
This is a slightly longer perspective and looks at the shift in market cap from the beginning of the bull-run. The table below captures the market gain multiple since 2003 as also the shift in share between these two periods…
Market Cap Ratio (2017/2003)
Share of global market cap in 2003 (%)
Share of global market cap in 2017 (%)
Data Source: Bloomberg
As the above table indicates, the last 14 years has seen the rapid rise of China in the global market cap stakes followed by India. China embarked on one of the longest investment-triggered booms and that has reflected in the market cap. While India had a market cap of $230 billion and China had a market cap of $420 billion, the growth in Chinese market has been almost twice that of that India. Interestingly, the rise of China and that of India in terms of market cap share has come at the cost of developed economies like the US, Japan and Europe. However, over the 14 year period, commodity driven economies have performed fairly well considering that their prosperity largely coincided with the onset of the commodity super-cycle of 2003.
The shift in market cap is largely indicative of how the global economic power equations have shifted since 2003. With India looking to sustain GDP growth rates above 7.5%, one can project much higher growth rates if GST is also factored in. While China may continue to dominate for some more time, the wind of change is clearly blowing in favour of India.