Our analysis shows that the global stock market remained resilient in the face of the COVID-19 pandemic, growing 20 percent overall between February 2020 and February 2021. Such growth may surprise some, but not smart investors: they understand that markets are built for the long term and that their composition differs from that of the real economy.
What is notable, however, are the differences in total returns to shareholders (TRS) among regions despite the global effects of the pandemic. Greater China led the world with local currency returns of 40 percent, followed by North America and Asia at 22 percent and 20 percent, respectively. Lagging behind were the Middle East and Africa (9 percent), Latin America (6 percent), and Europe (3 percent).
What accounted for these regional differences? To find out, we reviewed dynamics in the four regions with the largest capital markets—Asia, Europe, Greater China, and North America. We then compared the first three regions to North America in the following four domains (exhibit):
High tech. One big cause of the regional differences is that Greater China and North America are home to most of the companies that attracted the highest capital inflows in 2020. Consider that just 25 global companies—we call them the “Mega 25”—accounted for 40 percent of the increase in global market capitalization. Two-thirds of these companies are in high tech, and they include some of the world’s preeminent technology platforms. The rest of the Mega 25 companies are in the semiconductor, electric-vehicle, and Chinese consumer-goods industries. Eleven of the 25 are in Greater China, 11 are in North America, and the remaining three are located elsewhere. The very existence of the Mega 25 explains some of China’s stronger performance relative to North America and why Europe’s and Asia’s TRS are below that of North America.
Industry mix. After adjusting for the Mega 25, we found that North America had the industry mix with the highest potential for growth during the pandemic—for instance, in the high-tech, media, and medical-technology industries. Greater China’s TRS would have been six percentage points higher had it had the same industry mix. Its TRS was also bogged down by relatively high market representation from sectors with low growth during the pandemic—for instance, banking and real estate. The effect of industry mix was smaller for Asia and Europe.
Profit expectations. This factor explains the largest share of the TRS differences among regions. Analysts are forecasting that profits in Greater China will recover much faster than in all other regions since the pandemic was brought under control relatively quickly in this part of the world. This forecast added 13 percentage points to China’s TRS (relative to North America). Meanwhile, profit expectations in Asia are in line with those of North America. Europe is the only region where near-term profit expectations have taken a significant hit.
Multiples. Long-term earnings expectations, as implied in multiples, improved across all regions—indicating further anticipation of a strong post-COVID-19 recovery. In North America, for instance, multiples are 11 percent higher than they were a year ago. After correcting for differences in industry structure, multiples increased to varying degrees in Asia (more than five percentage points), Greater China (more than seven percentage points), as well as in Europe.
The figures show that the markets expect a strong recovery in all regions, but that each region is on its own trajectory.
- Greater China’s strong TRS performance can be attributed in part to the fact that it is home to about half of the Mega 25 companies as well as many other fast-growing businesses that offset its presence in other, sizeable slow-growth sectors.
- North America’s strong shareholder returns can be attributed to the Mega 25 as well as to the fact that it boasts an attractive overall industry mix compared with the other regions. Public companies in the region have been able to grow profits through the crisis.
- Asia’s TRS is just slightly below North America’s, and while the region is home to only a few Mega 25 companies, its multiples have grown, indicating strong long-term growth expectations.
- Europe’s story is more difficult: the continent is home to only one Mega 25 company, and it is struggling with an industry structure that is less geared for growth than North America’s. The markets expect Europe’s profit recovery to be the slowest among all regions.