The World Stock Index Unveiled - Key Insights and Analysis

The major global stock markets rose this week. European equities rallied after Beijing telegraphed measures to support the property sector.

In the immediate wake of Russia’s unprovoked invasion of cpi là gì Ukraine, distance became a big factor explaining cross-country variation in stock market performance (Chart 1). What has changed? Listen to learn more.

Key Insights and Analysis

In the past two weeks, global markets have been on edge as investors await key economic data on jobs, inflation and energy prices. The main indexes made modest moves to start the week, but markets have been jittery ahead of May consumer price inflation data that will be released Friday and could impact the Fed’s next move on interest rates.

The underlying question is whether the world stock market network reacts like one big system or if each country’s individual stock exchanges behave as separate, independent systems. The answer appears to be that there is a universal behavioral mechanism at play in the pricing done by traders. This is based on the fact that at the opening/close of each stock exchange new internal economic news is priced in via two different terms:

Term 1 represents the local, specific news affecting only the corresponding index and term 2 the big cumulative changes from other markets weighted by their importance (in terms of capitalization) and relatedness (in terms of geographical positioning representing e.g., overlap of common economic affairs or their importance as trading partners).

A large event in term 2 can have a pronounced effect on the corresponding market by triggering a synchronization of the local markets, whereby most of the individual country’s indices tend to follow each other with similar movements. This has been verified in numerous experiments using real data and it seems to also be true in the case of real time pricing.

Although the Sensex’s recent rise has been weighed down by rich headline valuations, Morgan Stanley strategists believe that the country is on the verge of a new profit cycle. Higher profits feed into investment, job creation and higher wages – a virtuous circle that should support a healthy economy.

The STOXX Europe 600

The European stock market is largely unloved by investors. The eurozone economy has been weak, the dollar high, and the FTSE 100 and the DAX both had their worst years since 2008 in 2022. Yet, there are some signs that the eurozone is improving and Europe’s stocks could get back in favor.

One big factor is valuation. European stocks are typically cheaper than those in the U.S. This means that you can buy more of them for the same money. In addition, European companies are often more global than those in the U.S. This makes them more attractive to foreign investors, who have been steady buyers of European stocks in recent years.

Another big factor is an improved regulatory and risk backdrop in Europe. Stringent stress tests, higher capital ratios and other rules have made European banks more resilient. At the same time, sovereign credit spreads have narrowed significantly thanks to the ECB’s pledge to cushion sovereign spreads with targeted asset purchases.

The STOXX 600 also benefits from less restrictive tax policies, lower labor costs, and lower corporate governance standards. The ESG ratings of the index’s components are generally good, though some European financial firms have some work to do.

The ESG rating of the iShares STOXX Europe 600 Banks (DE) is B-, and it has no exposure to companies that have violated the United Nations Global Compact Principles or are involved in weapons production. The fund also has very low fossil fuel exposure, earning the Morningstar Low Carbon designation. This is an excellent choice for a sustainable investor seeking to diversify into Europe. However, the fund’s ESG exposure score is not ideal, as it includes a small amount of exposure to tobacco producers.

The STOXX Japan

The Japanese stock market has the potential to offer significant alpha opportunities for fundamental active managers. Thin sell-side analyst coverage, an undersize venture capital funding environment and low correlations to major markets are all favorable for investors seeking to generate alpha through long-term investing in small Japanese companies with a focus on innovation and international expansion.

Japan is in the midst of a new economic era, ushered in by corporate reforms and increased integration with broader Asia. This lays the groundwork for future growth through improved earnings and lower debt levels. In addition, many Japanese companies are positioned to benefit from rising Asian incomes and expanding consumption through their global operations.

Last week, the Nikkei 225 Index and broad-based Topix Index gained 2.8% each as global equities advanced. Investors were encouraged by signs of cooling U.S. inflation, which may indicate that the Fed’s interest rate-hiking cycle is close to ending. They also welcomed the European Union’s decision to lift remaining restrictions on food imports from Fukushima.

Japan’s small-cap stocks are a good place to seek alpha, because 75% of the market is not covered by third-party research firms, with 22% having single-analyst coverage. This information asymmetry is significantly smaller than the U.S., Western Europe and Asia ex-Japan markets. In addition, small-cap Japanese stocks tend to be more liquid than frontier markets, a distinct advantage for investors seeking alpha in an efficient market. Leading European index provider Stoxx recently announced a licensing agreement with Mitsubishi UFJ Trust and Banking Corp (MUTB) to create and license smart beta indices that will underlie a new exchange-traded fund. The iStoxx MUTB Japan Quality 150 Index is designed to identify quality companies with stable and sustainable operating profits in the domestic market.

The STOXX China

The STOXX China index reflects 95% of the free float market capitalization of Chinese A-shares, which are listed and traded on the Shanghai and Shenzhen stock exchanges. These shares represent a growing share of the world’s economic output and offer an opportunity to diversify your portfolio.

Investing in emerging markets may involve additional risks, such as political instability, greater volatility and differences in accounting standards. As a result, investing in these regions may not be suitable for all investors.

Global equity markets rose as concerns over the Chinese property market cooled and investors monitored corporate earnings and key economic data. In Europe, shares in luxury goods maker Hermes International and the Cartier owner LVMH dropped after they reported disappointing results. In commodities, mining giants Anglo American Plc and Glencore Plc slumped as lower commodity prices dampened demand.

Investors were also looking at the latest earnings disclosures, with a number of big banks set to report their quarterly results later in the day. European banking stocks dipped as investors prepared for the possibility of weaker profit growth for some of the continent’s largest lenders.

In a similar vein, Chinese technology stocks rallied as the country’s top regulator signalled that it would review policies that have been restricting foreign investment in the sector. This has been a concern for some investors who are seeking to diversify their portfolios with exposure to the world’s second-largest economy.

If you’re interested in investing in China, one way to gain direct exposure is via the Shanghai-listed Yinhua SSE 50 Equal Weight ETF (510430). This ETF offers an equally weighted exposure to large-cap China A shares. The index excludes those companies that have committed major illegal activities or made false financial reports in the past three years.

The STOXX Asia

The STOXX Europe 600 is a subset of the popular Stoxx Global 1800 Index, and it’s often cited as a European alternative to the Standard & Poor’s 500 Index. It includes large, blue-chip companies from 16 developed European markets. France and Germany dominate the index with 17 and 16 components respectively. Several single-country sub-indices are also available.

The rise in interest rates continues to weigh on high-duration sectors, with the top quintile of our duration factor down 10% vs a gain of 5% for the bottom five. Recession fears have also hurt the cyclical groups, which make up 80% of our index members. But these sectors are delivering solid earnings and have a healthier financial position than a decade ago. That’s a good basis for a rerating in their valuations, but one that will need to be sustained.

Meanwhile, emerging market equities could benefit as valuations become more attractive and the prevailing economic conditions shift in their favor. But they will need to continue to deliver strong earnings growth to support their rerating, especially given the weak start to the year.

Finally, Chinese stocks climbed after Beijing telegraphed measures to stimulate the economy and boost property development. The Shanghai Composite rose 1.29% and the CSI 300 gained 1.92%. The Hong Kong Stock Exchange (HKEX) celebrated its 23rd anniversary on Wednesday, with its CEO Nicolas Aguzin and chairwoman Laura Cha sounding the ceremonial gong in Connect Hall. Aguzin emphasized that HKEX will continue to promote green finance and yuan products. In the future, he said, the exchange will also work to attract international investors. This would be in line with its ambition to develop as a regional capital marketplace.