World stock markets finally expunged the memories of one of the worst bear markets in history recently when they surpassed the levels reached ahead of the collapse of the dotcom bubble in 2000.
The most widely used yardstick of equity performance around the globe, the Morgan Stanley Composite Index (MSCI), showed that a recovery in developed economies coupled with boom conditions in emerging markets has created a new record for shares.
It was on March 27 2000 that the MSCI reached its former peak, the month when Lastminute.com was floated on the London Stock Exchange and Robert Schiller, a Yale economics professor, published Irrational Exuberance, his timely warning that the new economy bubble of the late 1990s was about to burst.
In the subsequent two years, stock markets around the world crumpled.
Investors became more averse to risk and far less tolerant of the lack of up-front profits being delivered by Internet stocks. The fear of terrorism, the build-up to war in Iraq and a slew of corporate scandals hardly helped sentiment either.
The nadir for global markets arrived in early 2003 just as the drumbeats of war were at their loudest. At that time, the MSCI had halved in the three years since its peak, but just as the toppling of Saddam Hussein marked a turning point for the price of oil so it saw the start of a sustained bull market in equities.
Some of the developed country markets have yet to match their former levels. The United Kingdom’s FTSE 100 Index was trading yesterday at just under 6 100 — still well short of the record reached on New Year’s Eve 1999, when it stood just shy of 7 000. Similarly, the Dow Jones Industrial Average is still making up the ground lost between 2000 and 2003.
The United States accounts for almost half — 45% — of the composite MSCI, with shares in Britain, Japan, Germany and France also having a strong weighting in the list of 2 618 stocks from 49 countries. Japan, where it was announced yesterday that land prices in Tokyo had risen for the first time in 15 years, has been one of the star performers in the G7 industrial countries during the recovery, but the Nikkei index is still less than half as high as it was in the late 1980s.
What has really propelled the MSCI has been the runaway performance in emerging economies. In some countries, there have been specific factors at play. Russia, for example, has been helped by the huge rise in oil prices from about $25 a barrel in 2003 to just under $70 a barrel this week.
The oil story does not, however, apply to India, which has been a star performer in the MSCI in recent years. Investors have been attracted to the world’s second-most populous country not only by the strong growth since the economic reforms of the early 1990s, but also by India’s flourishing software sector and its educated, English-speaking middle class.
But there have also been three general factors at work. The first has been the injection of liquidity into markets by the Federal Reserve and other central banks in 2001 to 2002. Lower interest rates were deployed to fend off recession, but had the spin-off effect of making money available for speculative investment.
The second factor was that low interest rates enabled investors to borrow cheaply in the developed markets of the West and use the cash to buy assets in higher yielding, if riskier, emerging markets.
Traders have gambled that countries in the developing world are less vulnerable than they were when Mexico, Thailand, Russia and Brazil imploded in the 1990s, and so far the gamble has paid off. Iceland has been the one victim of the so-called carry trade phenomenon.
Finally, oil producers such as Saudi Arabia have found their treasury coffers awash with an unexpected windfall as a result of soaring oil prices, and they have recycled the proceeds of the energy spike into Western stock markets.
So what happens now? Pessimists say interest rates are now rising around the world and that growth is likely to slow in the second half of this year, taking the edge off equity markets. Optimists say that, unlike the dotcom bubble, the companies whose shares are doing best are making profits. — Â