Globe World

Recent Trends in the Global Market Breakdown

Globe World

The world economy is a continuously shifting system. Consumer preferences are in constant flux and new ideas for businesses are cropping up what seems like every single day. Where investors place value can tell us a lot about the future growth of any local or regional economy, as well as future expected returns. While the news is quick to highlight what seems like the most troubling economy in the world, having a perspective in a greater context can provide insight.

The global market breakdown is a 30,000-foot view of the global investment landscape (at least for publicly traded companies). We can dissect it by numerous metrics such as size, relative price, region, country, and sector, just to name a few. Here are some highlights and trends as of the end of the third quarter, 2015.

In terms of overall investment value, the United States currently makes up 53% of the entire global market capitalization. The International Developed market makes up 37% and the Emerging Markets make up approximately 10%. This encompasses approximately 12,200 publicly traded companies around the world and an aggregate investment value of $39.5 trillion dollars. When you invest in an IFA Index Portfolio, you are opening yourself up to receiving part of this total value.

In terms of size, the very largest companies in the world make up approximately 70% of the total investment value in the world economy, but less than 10% of the entire investment universe. While investors may be more comfortable with the larger and well-known companies like Wal-Mart, they may be leaving opportunity (i.e. diversification and return) on the table by not taking advantage of the other 90% of the investable universe. We were recently featured in a US News article talking about the benefits of moving into smaller areas of the market. As we point out, historically, investors have been rewarded for taking advantage of the smaller areas of the market without taking on a significant amount of risk in the context of a globally diversified portfolio. In other words, where investors are concerned with familiarity, they can be better served with a little insight from their financial advisor.

The financial media has covered countries like China and Greece extensively this year. Just to put it in perspective, 80% of all investment value lies within 7 countries; those being the United States, Japan, United Kingdom, France, Switzerland, Canada, and Germany. China and Greece, on the other hand, only make up approximately 2.25% combined. With China being the second largest economy in the world behind the United States, their local economic troubles have acted as a contagion to the rest of the world. Nonetheless, their overall impact to investors has been minimal. We recently reported that their net return for the 3rd Quarter of 2015 was -24%. A globally diversified portfolio lost less than half of that and has already recovered significantly in the month of October.

The global market breakdown also highlights the benefits of diversifying outside of the United States. Of the approximately 12,200 publicly traded companies in the investable universe, companies based in the United States only make up approximately 30% of it. Further, of the remaining 70%, Emerging Markets make up approximately 30%. While these areas of the market have not rewarded investors over the last 10 years, they have compensated investors over the last 20 and 30 year time periods, especially in the small-cap and value oriented areas of the market.

Top sectors in the global economy from greatest to least are financials (19.21%), information technology (13.73%), consumer discretionary (13.04%), health care (12.30%), and industrials (11.50%). Interestingly enough, these sectors also tend to be more growth oriented in terms of price to book value, except for financials. Diversifying into sectors such as energy, materials, telecommunications, and utilities are an additional benefit for investors since these more value oriented sectors have provided higher rates of return over long time horizons even though these sectors combined make up less than 25% of the entire global market.

Perspective can be very insightful for investors, and the global market breakdown provides the 30,000-foot perspective. While most investors focus on the performance of the S&P 500 or the Dow Jones Industrial Average, there is a lot more out there for investors to gain exposure to. Diversifying assets outside of the United States has provided value to investors over long time horizons. Further, moving away from familiarity allows investors to take advantage of a greater investable universe that has historically provided higher rates of return. The media may be quick to highlight the most troubling areas in the entire world, which may cause short-term volatility in the market, but minimal impact on the long-term performance of a globally diversified portfolio.

The last point we will make is that while we highlight the benefits of international diversification, small cap stocks, and sectors that have been historically value-oriented, it is best to gain exposure to these segments of the market through a passively managed index fund. These metrics represent the collective estimate of all global participants of the value of publicly traded companies around the world. We do not know which country or sector will be the next winner so it is prudent to hold all of them.