It has been a tremendous golden age for equities; yet also a stormy mix of of wealth creation, its destruction, and the best and worst of reactionary human emotions. What is now becoming clear, however, is that this sometimes torrid relationship is losing its appeal.
According to the Triennial Central Bank Survey data from the Bank for Intentional Settlements currency trading around the world has hit $4 trillion a day in value (using April 2010 data). This represents a 20% gain from the $3.3 trillion in 2007. Compare this to US equity markets that average $134 billion a day, down from a daily average of $148 billion in 2007.
Activity in OTC interest rate derivatives grew by 24%, with average daily turnover of $2.1 trillion in April 2010. Trading in U.S. Treasurys averaged $456 billion a day in April, down from an average of $570 billion for all of 2007.
Despite the volume of news devoted to equities, it is clear to see where all the big money is. Yet we live in a financial world where importance is improperly skewed towards equities. To this end, Citi Global Equity Strategies has just published a report entitled The End of a Cult. The key conclusions of the report are that conventional investors will remain sellers, driven by the re-weighting of bond holdings, and that there will be a de-equitisation process to clear the large overhang in stock.
The numbers are stark: in 2009 US private sector pension funds held 55% of total assets in equities down from 70% in 2006. UK pension funds cut their equity weighting to 39% in 2009, down from the 76% high in 1993. Japan might be a window into the future of this process - pension funds now hold only 36% of assets in equities.
Citi explores the "de-equitisation" as a way to shrink the enormous oversupply of equity as demand from investors dries up. This process includes M&A and share buybacks. This augers poorly for the kind of capex boom that the world needs right now. Consolidation rather than expansion does not create growth nor jobs.What has happened since then is not encouraging. The following total volume charts of the NYSE over 5 years and the ASX over the last year are a clear sign of the shift:
Volatility, the unprecedented influence of political action and fiscal policy, and changing demographics of investors are all factors in play here. in Australia many retail invests have self-managed super funds, which allows them significant tax mitigation in their share dealing. However, If you are a self-funded retiree or close to retirement, I'm sure that the appetite to commit capital to risky equities is greatly diminished. I'm not suggesting that retail investors are going on strike permanently, but Australian portfolios have been extremely unsophisticated in that they have been hugely underweight fixed income or indeed anything that is not property or shares. I lump Australian superfunds into this characterisation, too. Australian supers have an extraordinarily high weighting in equities for pension funds that surely protect capital first and foremost.
Again, I must stress that I don't believe that the demand for equities is going away, nor that there won't be another bull market. Simply, the axiom that equities are a great long term investment, that buy and hold is the key to wealth generation, is no longer axiomatic after the crushing blows of two great bear markets since 2000 and a negative return over the first 10 years of the 21st century. The greatest bull market in history from 1980 to 2000 is unlikely to be repeated in the near future. Investors are voting with their feet.