Global equities – why now?
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Empirical evidence shows that equities have been a consistent source of long-term returns, outperforming other asset classes over multiple decades1. In addition, that longer equity holding periods may help reduce risk and improve performance.1 Yet despite this, the average equity holding period has decreased significantly over time.2
Today’s challenging economic conditions, where stretched valuations leave investors vulnerable, with little to no room for error, have reinforced our commitment to global equities as a core component of an investment portfolio.
An allocation to global equities provides geographic and sectoral diversification opportunities3 along with the ability to earn higher returns in the long-run, therefore potentially allowing investors to benefit from the equity risk premium4.
The case for long-term investing
Over the past several decades, the average holding period for equities has declined markedly, from seven years to 10 months.2 This owes largely to technological advancements, such as the automation of exchanges, which has brought down transaction costs and increased the volume of trades that can be processed, leading to the growth of high frequency trading (HFT) from the early 2000s. HFT, which uses algorithms to trade stocks at ultra-fast speed, now accounts for around 50% of total stock trading volume in the US and 40% in Europe5, and has thereby played a significant role in reducing the average stock holding period.
Technological progress has also changed the way individuals think about investing. With trading more accessible via online platforms and at one’s fingertips through mobile apps, investors have become far more active and less patient.
A potential pitfall of focussing on short-term returns, rather than long-term fundamental value, though, is that investors may be tempted to sell prematurely or buy impulsively, and this can be detrimental to long-term performance.
Average stock holding period has consistently declined since the 1940s
Average holding period for a stock on the NYSE (in years, 10yr avg)
*The ratio of the market value of the shares outstanding to the value of shares traded, ten year average.
Source: NYSE, Bloomberg, Amundi. Data as at 20/02/2024. Past performance is not a reliable indicator of future performance.
Equities offer the potential for consistent, long-term returns
Equities can be volatile, especially over shorter periods, and it is not difficult to demonstrate why maintaining a longer investment horizon may be more desirable.
The following chart shows the range of annualised change for the MSCI World Index since the early 1970s for different holding periods (the returns are annualised to make the results comparable across different time frames). It is evident that the variability of returns diminishes as the time frame grows. This implies that expanding the time horizon of an investment into equities potentially allows for smoother compounded annualised returns compared to shorter-term returns that can face higher spikes in volatility.
MSCI World - long term performance (in %, annualised)
Performance NTR in USD. Source: Bloomberg, Amundi. Data as at 20/02/2024. Past performance is not a reliable indicator of future performance
Evidence also suggests a longer holding period for equites improves the chances of positive performance. This of course includes times such as at the present, when valuations are stretched.
The chart that follows uses US equities as a proxy for global equities’ performance (US equities currently account for around 60% of global equities).6
Such analysis suggests around 9% of annualised returns for equities since 1871 in nominal terms (or 6.9% annualised in real terms). This compares to just 2.5% of annualised returns for government bonds on average – in real terms – over the same time span.
Source: Amundi, Shiller, Maddison Project. Data as at 22/02/2024. Past performance is not a reliable indicator of future performance.
Diversify3 and capture growth opportunities with global equities
Many investors lean towards a home-country bias in equity investing due to their familiarity with the local markets and a perception that investing domestically helps mitigate currency risk.
However, this approach may inadvertently heighten portfolio risk by limiting diversification3 to the local market, and it could also mean missing out on international return-enhancing opportunities.
By contrast, embracing global equities can offer several distinct advantages:
- Enhanced diversification3
Investing across various economies and markets can help reduce the impact of volatility in any single domestic market, potentially leading to a more stable and resilient portfolio.7
- A deeper opportunity set
An allocation to global equities can provide access to some of the world’s leading companies and a broader array of industries and sectors not always available or prominent in one's home market.
- Opportunities in different economic cycles
Investing in global equities allows you to take advantage of the varying economic cycles of different countries, capitalising on growth in expanding economies while others are contracting. This can help diversify3 potential risks as well as enhance returns.
- Attractive valuations
Global equity markets provide opportunities to buy stocks at lower valuations due to different market dynamics, providing potentially higher returns as these valuations normalize.
- Potential currency gains
Through exposure to different currencies, allocating to global equities can also help hedge against the impact of domestic currency fluctuations. A weaker home currency may boost returns on foreign investments.
Accessing the global opportunity
One of the easiest and most cost-efficient ways to invest in international equities is through ETFs, which provide investors with access to global markets through a single transaction, and trade like a stock.
Diversify3 in Developed Markets
TheAMUNDI MSCI WORLD UCITS ETF, for instance, provides exposure to over 1,600 large and mid-cap stocks across 23 developed markets4. And for those looking to position their portfolios for the climate transition, there is the AMUNDI MSCI WORLD ESG CLIMATE NET ZERO AMBITION CTB UCITS ETF, which is also based on MSCI World, but selects and weights securities according to ESG criteria and EU directives on climate protection.
Capture Emerging Markets’ Growth Potential
Investors seeking an even more comprehensive level of diversification may wish to consider the AMUNDI PRIME ALL COUNTRY WORLD UCITS ETF, which offers highly-diversified2 exposure to large and mid-cap stocks in both developed and emerging markets. The IMF estimates 4.0% GDP growth YoY on average for EM economies over the next five years, twice as much as the forecast for DM over the same period (1.7% YoY).
The choice ultimately comes down to investor preferences and requirements.
1. https://www.investopedia.com/ask/answers/032415/which-investments-have-highest-historical-returns.asp.
Past performance is not a reliable indicator of future performance.
2. Source: NYSE, Bloomberg, Amundi. Data as of 20/02/2024.
3. Diversification does not guarantee a profit or protect against a loss.
4. The equity risk premium (ERP) refers to the additional return that investors expect to derive from investing in equities over and above that of a so-called risk-free investment such as government bonds.
5. Source: European Central Bank. Research Bulletin. No.78. How does competition among high-frequency traders affect market liquidity? December 2020
6. https://www.statista.com/statistics/710680/global-stock-markets-by-country/
7. Investment involves risks. For more information, please refer to the Risk section below.
8. For more information, please refer to the KID or the prospectus of the Fund.
Information on Amundi’s responsible investing can be found on amundietf.com and amundi.com. The investment decision must take into account all the characteristics and objectives of the Fund, as described in the relevant Prospectus.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Information Document (‘KID’) or Key Investor Information Document (“KIID”) for UK investors and prospectus available on our websites www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com or lyxoretf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
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