A simplistic monetarist view is that countries with higher rates of inflation-adjusted money supply growth should experience stronger economic and equity market performance.
The first chart shows six-month changes in real broad money across the major developed economies. At the start of 2009, real money trends were much stronger in the US, Canada and Australia than in Japan and Europe.
The second chart shows year-to-date equity market performance for the same group of countries, including the impact of currency fluctuations and expressed relative to the World index. As suggested by money supply growth, Canada and Australia have outperformed significantly, while Japan and Europe ex. the UK have lagged the global average.
China is not included in the charts. Its monetary growth and equity market performance have been stronger than in any of the developed countries shown.
The main deviation from the monetarist relationship so far this year has been the relative weakness of the US stock market, despite monetary strength in late 2008 / early 2009. This may partly reflect a drag from much heavier equity issuance than in other markets. US relative performance could improve as issuance abates, although the monetary backdrop is less favourable than at the start of 2009 – see earlier post.
Real money growth has accelerated in the UK and to a lesser extent Japan since early 2009 while slowing in the Eurozone – first chart. Since the start of the second quarter, UK equities have outperformed the other markets with the exception of Canada. Assuming that monetary trends continue to benefit from QE, UK relative gains could be sustained during the second half.
