These 6 Powerful Signals Reveal the Future Direction of Financial Markets
Connect with us

Markets

These 6 Powerful Signals Reveal the Future Direction of Financial Markets

Published

on

Powerful signals reveal the future direction of financial markets

Every day, the Information Age bombards us with massive amounts of data.

Experts now estimate that there are 40 times more bytes of data in existence than there are stars in the whole observable universe.

And like the universe, our datasphere is also rapidly expanding—and every few years, there is actually more new data created than in all prior years of human history combined.

Searching for Signals

On a practical level, this dense wall of impenetrable data creates a multitude of challenges for investors and decision makers alike:

  • It’s mentally taxing to process all the available information out there
  • Too much data can lead to “analysis paralysis”—an inability to make decisions
  • Misinformation and media slant add another layer for our brains to process
  • Our personal biases get reinforced by news algorithms and filter bubbles
  • Data sources—even quality ones—can sometimes conflict with one another

As a result, it’s clear that people don’t want more data—they want more understanding. And for this reason, our team at Visual Capitalist has spent most of 2020 sifting through the noise to find the underlying trends that will transform society and markets over the coming years.

The end result of this effort is our new hardcover book “SIGNALS: Charting the New Direction of the Global Economy” (hardcover, ebook) which beautifully illustrates 27 clear signals in fields ranging from investing to geopolitics.

The 6 Signals Shaping the Future of Finance

What clear and simple trends will shape the future of markets?

Below, we show you a small selection of the hundreds of charts found in the book with a focus on global finance and investing:

#1: 700 Years of Falling Interest Rates

The first signal we’ll showcase here is from an incredible dataset from the Bank of England, which reconstructs global real interest rates going back all the way to the 14th century.

Falling real interest rates over 700 years

Some of the first data points in this series represent well-documented municipal debt issued in early Italian banking centers like Genoa, Florence, or Venice, during the beginning stages of the Italian Renaissance.

The early data sets of loans to noblemen, merchants, and kingdoms eventually merge with more contemporary data from central banks, and over the centuries it’s clear that falling interest rates are not a new phenomenon. In fact, on average, real rates have decreased by 1.6 basis points (0.016%) per year since the 14th century.

This same spectacle can also be seen in more modern time stretches:

Contemporary interest rates by country

And as the world reels from the COVID-19 crisis, governments are taking advantage of record-low rates to issue more debt and stimulate the economy.

This brings us to our next signal.

#2: Global Debt: To $258 Trillion and Beyond

The ongoing pandemic certainly made analysis trickier for some signals, but easier for others.

The accumulation of global debt falls into the latter category: as of Q1 2020, global debt sits at a record $258 trillion or 331% of world GDP, and it’s projected to rise sharply as a result of fiscal stimulus, falling tax revenues, and increasing budget deficits.

Rising Global Debt

The above chart takes into consideration consumer, corporate, and government debt—but let’s just zoom in on government debt for a moment.

The below data, which is from early 2020, shows government debt ballooning between 2007 and early 2020 as a percentage of GDP.

Ballooning government debt

This chart does not include intragovernmental debt or new debt taken on after the start of the pandemic. Despite this, the percentage increase in debt held by some of these governments is in the triple digits over a period of only 13 years, including the 233% increase in the United States.

But it’s not just governments going on a borrowing spree. The following chart shows consumer debt over a recent four-year span, sorted by generation:

Average household debt by generation

While Baby Boomers and the Silent Generation are successfully winding down some of their debt, younger generations are just getting aboard the debt train.

Between 2015-2019, Millennials added 58% to household debt, while Gen Xers find themselves (in the middle of their mortgage-paying years) as the most indebted generation with $135,841 of debt per household.

#3: Blue Chips and the Circle of Life

There was a time when it seemed absolutely unfathomable that large, entrenched companies could see their corporate advantages slide away.

But as the recent collapses of Blockbuster, Lehman Brothers, Kodak, or various retailers have taught us, there are no longer any guarantees around corporate longevity.

Average company lifespan on S&P 500

In 1964, the average tenure of a company on the S&P 500 was 33 years, but this is projected to fall to an average of just 12 years by the year 2027 according to consulting firm Innosight.

At this churn rate, it’s expected that 50% of the S&P 500 could turnover between 2018-2027.

Churn of S&P 500 companies

For established companies, this is a sign of the times. Between the rapid acceleration in the speed of innovation and continuously falling barriers to market entry, the traditional corporate world finds itself playing defense.

For investors and startups, this is an interesting prospect to consider, as disruption now appears to be the status quo. Could the next big company to dominate global markets be found in someone’s garage in India today?

If you like this post, find hundreds of charts
like this in our new book “Signals”:


Signals: Book

#4: ESG is the New Status Quo

The investment universe has reached an interesting tipping point.

Historically, performance was all the mattered to most investors—but going forward, considering ESG criteria (environment, social, and governance) is expected to become a default component of investment strategy as well.

Esg assets as percentage of total

By the year 2030, it’s expected that a whopping 95% of all assets will incorporate ESG factors.

While this still seems far away, it’s clear that change is already happening in the investment sphere. As you can see in the following graphic, the percentage of ESG assets has already been rising by trillions of dollars per year globally:

Sustainable investing assets esg

If you think this is a powerful trend now, wait until Millennials and Gen Z investors sink in their teeth. Both generations show a higher interest in sustainable investing, and both are already more likely to incorporate ESG factors into existing portfolios.

Projected aggregate income by generation

Companies are getting in front of the ESG investing trend, as well.

In 2011, just 20% of companies on the S&P 500 provided sustainability reports to investors. In 2019, that percentage rose to 90%—and with the world’s biggest asset managers already on board with ESG, there’s pressure for that to hit 100% in the coming years.

#5: Stock Market Concentration

In the last 40 years, the U.S. market has never been so concentrated as it is now.

Big tech five stocks as a percentage of S&P 500

The top five stocks in the S&P 500 have historically made up less than 15% of the market capitalization of the index, but this year the percentage has skyrocketed to 23%.

Not surprisingly, it’s the same companies—led by Apple and Microsoft—that propelled market performance the previous year.

Tech stocks by percentage of 2019 stock market return

Looking back at the top five companies in the S&P 500 over time helps reveal an important component of this signal, which is that it’s only a recent phenomenon for tech stocks to dominate the market so heavily.

Tech stocks each year

#6: Central Banks: Between a Rock and a Hard Place

Since the financial crisis, central banks have found themselves to be in a tricky situation.

As interest rates close in on the zero bound, their usual toolkit of conventional policy options has dried up. Traditionally, lowering rates has encouraged borrowing and spending to prop up the economy, but once rates get ultra-low this effect disappears or even reverses.

Treasury yields vs. household spending

The pandemic has forced the hand of central banks to act in less conventional ways.

Quantitative easing (QE)—first used extensively by the Federal Reserve and European Central Bank after the financial crisis—has now become the go-to tool for central banks. By buying long-term securities on the open market, the goal is to increase money supply and encourage lending and investment.

In Japan, where QE has been a mainstay since the late-1990s, the Bank of Japan now owns 80% of ETF assets and roughly 8% of the domestic equity market.

Central bank assets rising

As banks “print money” to buy more assets, their balance sheets rise concurrently. This year, the Fed has already added over $3.5 trillion to the U.S. money supply (M2) as a result of the COVID-19 crisis, and there’s still likely much more to be done.

Regardless of how the monetary policy experiment turns out, it’s clear that this and many of the other aforementioned signals will be key drivers for the future of markets and investing.

If you like this post, find hundreds of charts
like this in our new book “Signals”:


Click for Comments

Markets

Mapped: Distribution of Global GDP by Region

Where does the world’s economic activity take place? This cartogram shows the $94 trillion global economy divided into 1,000 hexagons.

Published

on

Map of Global Wealth Distribution

Mapped: The Distribution of Global GDP by Region

Gross domestic product (GDP) measures the value of goods and services that an economy produces in a given year, but in a global context, it is typically shown using country-level data.

As a result, we don’t often get to see the nuances of the global economy, such as how much specific regions and metro areas contribute to global GDP.

In these cartograms, global GDP has been normalized to a base number of 1,000 in order to show a more regional breakdown of economic activity. Created by Reddit user /BerryBlue_Blueberry, the two maps show the distribution in different ways: by nominal GDP and by GDP adjusted for purchasing power parity (PPP).

Methodology

Before diving in, let us give you some context on how these maps were designed. Each hexagon on the two maps represents 0.1% of the world’s overall GDP.

The number below each region, country or metropolitan area represents the number of hexagons covered by that entity. So in the nominal GDP map, the state of New York represents 20 hexagons (i.e. 2.0% of global GDP), while Munich’s metro area is 3 hexagons (0.3%).

Countries are further broken down based on size. Countries that make up more than 0.95% of global GDP are broken down into subdivisions, while countries that are smaller than 0.1% of GDP are grouped together. Metro areas that account for over 0.25% of global GDP are featured.

Finally, it should be noted that to account for some outdated subdivision participation data, the map creator calculated 2021 estimates for this using the formula: national GDP (2021) x % of subdivision participation (2017-2020).

Nominal vs. PPP

The above map is using nominal data, while the below map accounts for differences in purchasing power (PPP).

Adjusting for PPP takes into account the relative value of currencies and purchasing power in countries around the world. For example, $100 (or its exchange equivalent in Indian rupees) is generally going to be able to buy more in India than it is in the United States.

This is because goods and services are cheaper in India, meaning you can actually purchase more there for the same amount of money.

Anomalies in Global GDP Distribution

Breaking down global GDP distribution into cartograms highlights some interesting anomalies worth considering:

  1. North America, Europe, and East Asia, with a combined GDP of nearly $75 trillion, make up 80% of the world’s GDP in nominal terms.
  2. The U.S. State of California accounts for 3.7% of the world’s GDP by itself, which ranks higher than the United Kingdom’s total contribution of 3.3%.
  3. Canada as a country accounts for 2% of the world’s GDP, which is comparable to the GDP contribution of the Greater Tokyo Area at 2.2%.
  4. With a GDP of $3 trillion, India’s contribution overshadows the GDP of the whole African continent ($2.6 trillion).
  5. This visualization highlights the economic might of cities better than a conventional map. One standout example of this is in Ontario, Canada. The Greater Toronto Area completely eclipses the economy of the rest of the province.

Inequality of GDP Distribution

The fact that certain countries generate most of the world’s economic output is reflected in the above cartograms, which resize countries or regions accordingly.

Compared to wealthier nations, emerging economies still account for just a tiny sliver of the pie.

India, for example, accounts for 3.2% of global GDP in nominal terms, even though it contains 17.8% of the world’s population.

That’s why on the nominal map, India is about the same size as France, the United Kingdom, or Japan’s two largest metro areas (Tokyo and Osaka-Kobe)—but of course, these wealthier places have a far higher GDP per capita.

Continue Reading

Energy

The Top 10 Biggest Companies in Brazil

What drives some of the world’s emerging economies? From natural resources to giant banks, here are the top 10 biggest companies in Brazil.

Published

on

The Top 10 Biggest Companies in Brazil Oct 10 Share

The Top 10 Biggest Companies in Brazil

In 2009, the at-the-time emerging economies of Brazil, Russia, India, and China held their first formal summits as members of BRIC (with South Africa joining in 2010).

Together, BRICS represents 26.7% of the world’s land surface and 41.5% of its population. By GDP ranking, they’re also some of the most powerful economies in the world.

But what drives their economies? We’re highlighting the top 10 biggest companies in each country, starting with Brazil.

What Are the Biggest Public Companies in Brazil?

Brazil isn’t just one of the largest and most diverse countries in the world, it is also an economic powerhouse.

With over 213 million people, Brazil is the sixth most populous country on Earth and the largest in Latin America. It’s also the wealthiest on the continent, with the world’s 12th-largest economy.

Once a colony focused on sugar and gold, Brazil rapidly industrialized in the 20th century. Today, it is a top 10 exporter of industrial steel, with the country’s economic strength coming chiefly from natural resources and financials.

Here are Brazil’s biggest public companies by market capitalization in October 2021:

Top 10 Companies (October 2021)CategoryMarket Cap (USD)
ValeMetals and Mining$73.03B
Petróleo BrasileiroOil and Gas$69.84B
AmbevDrinks$43.87B
Itaú UnibancoFinancial$41.65B
Banco BradescoFinancial$34.16B
WEGIndustrial Engineering$29.43B
BTG PactualFinancial$25.01B
Banco Santander BrasilFinancial$24.70B
Rede D’Or Sao LuizHospital$23.79B
XP Inc.Financial$22.45B

At the top of the ranking is Vale, a metals and mining giant that is the world’s largest producer of iron ore and nickel. Also the operator of infrastructure including hydroelectricity plants, railroads, and ports, It consistently ranks as the most valuable company in Latin America.

Vale and second-ranking company Petróleo Brasileiro, Brazil’s largest oil producer, were former state-owned corporations that became privatized in the 1990s.

Finance in Brazil’s Top 10 Biggest Companies

Other than former monopolies, the top 10 biggest companies in Brazil highlight the power of the banking sector.

Five of the 10 companies with a market cap above $20 billion are in the financial industry.

They include Itaú Unibanco, the largest bank in the Southern Hemisphere, and Banco Santander Brasil, the Brazilian subsidiary of Spanish finance corp.

Another well-known subsidiary is brewing company Ambev, which produces the majority of the country’s liquors and also bottles and distributes PepsiCo products in much of Latin America. Ambev is an important piece of Belgian drink juggernaut Anheuser-Busch InBev, which is one of the world’s largest 100 companies.

Noticeably missing from the top 10 list are companies in the agriculture sector, as Brazil is the world’s largest exporter of coffee, soybeans, beef, and ethanol. Many multinational corporations have Brazilian subsidiaries or partners for supply chain access, which has recently put a spotlight on Amazon deforestation.

What other companies or industries do you associate with Brazil?

Correction: Two companies listed had errors in their market cap calculations and have been updated. All data is as of October 11, 2021.

Continue Reading

Subscribe

Popular