Total global stock market capitalization, or total market value of all exchange-traded corporations worldwide, has reached a new historical record of USD 90.1 trillion. This is also reflected in the value of our global composite proprietary equity valuation, which currently stands at + 33% and is thus at its highest level since mid-2002.
Global stock markets are now valued relatively high. And it is precisely equity valuations that are critical to medium-term expected equity performance. Therefore, we now expect the average expected annual return over the medium term of the next five years, including dividends, to be only around 3-4%.
At first glance, of course, this expected performance of global stock markets seems very low. However, this is unfortunately the current reality of global stock markets. The market value of global stock markets is at a record high and corporate fundamentals such as revenues, earnings and cash flow are pushed down by the global Covid-19 pandemic compared to the original long-term trend.
Equity valuations have a strong tendency to return to long-term average values (mean-reversion) in the medium term of about five years. Given that they are currently well above long-term historical averages, see our global composite proprietary equity valuation of +33%, the contribution of changes in equity valuations to overall equity performance is very likely to be strongly negative over the next five years.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.