Market commentators have been remarking lately about the supposedly surprising resilience of equity prices in the face of setbacks in the global economy and in corporate earnings and inflation trends.
There may be a simpler explanation for this phenomenon and it has to do with supply and demand dynamics.
In spite of fast-growing demand for new equities, supply has been stagnant, which implies more money chasing a limited supply of stocks.
Global assets under management have been rising continuously since 2001, reaching US$112 trillion by end-2021 after a 12% jump that year alone according to the Boston Consulting Group. PricewaterhouseCoopers estimates a further surge to $145 trillion by 2025. Equities account for the lion’s share of these assets.
Meanwhile, data from the World Federation of Exchanges shows that the net number of listed companies worldwide has been static at around 58,000 since the beginning of 2020 in the Americas and Asia Pacific, Europe, and most emerging markets. In fact, it has declined over the past five years or so.
Yet global equity market capitalisation quadrupled to $120 trillion between 2000 and 2021, with Asia accounting for most of the rise. Although it has since eased to $85 trillion according to Datastream, the size of equity assets under management has continued to surge.
Put simply, the “wall of water” or liquidity pouring into equity assets worldwide has not been matched by the ability of listed firms to absorb the inflow.
The result has been equity asset inflation, and a growing mismatch in the size of equities relative to the real economy, especially during the long period of excess financial liquidity and rock bottom interest rates before last year.
Meanwhile, sectors of the global economy that require and deserve greater attention from equity investors – such as financing the battle against climate change, investments in global infrastructure, and healthcare – are not getting it, owing to the relative scarcity and limited spread of net new listings.
The popularity of environmental, social and governance investing hasn’t broadened the spectrum of listed companies that operate in the green zone, or in infrastructure or healthcare.
Market commentators need to take note of the fact that resilient share prices do not necessarily indicate confidence that all is well with the market and with the global economy. It’s just that there’s no place else to go.
