Global Markets Then and Now: The Changing Role of the United States
Significant changes are unfolding in the world’s equity markets. In the past, the United States dominated the global stock markets, accounting for as much as 54% of the overall markets’ value (as measured by the MSCI All Country World Index). Over the last several years, however, the U.S. portion has declined, while the representation of emerging market countries has surged. Japan has seen an even more drastic reduction in its share of the global markets; once a rival to the U.S. in terms of stock market share, it now languishes at less than a third of its former position.
Back in 1990, midway through the long U.S. bull market, the global markets looked quite different than they do today. As seen in the table below, the U.S. share was nearly 36%, with Japan not far behind at about 32%. The top markets in Europe (the U.K., France, and Germany) accounted for about 18% of the global market. The entire rest of the world shared the remainder – a bit under 15%, with emerging markets barely visible at 1.5%.
Near the end of the U.S. bull market, in 1999, the U.S. made up over 46% of the world’s stock markets, and still had not reached its peak. (Meanwhile Japan’s share had plummeted to 12.7%, as a result of its economic depression and stock market implosion.) By the end of 2002, the good times in most markets had been replaced by three ugly bear market years, though the U.S. share of world markets had actually grown to 54% (and Japan had fallen further, to 8.4%).
Since 2002, things have again changed rapidly. By December 2006 the U.S. share has fallen to about 45% of the global markets. Interestingly the top European markets’ share has remained relatively unchanged (and has done so for nearly the last two decades), while Japan’s share remains well below its peak. Emerging markets are the real growth story, having expanded to represent over 8% of the world’s equity markets.
It’s likely that the U.S. portion will continue to decline over time, not because of weakness in the U.S., but because growth rates in the rest of the world will probably continue to be significantly stronger. Gross Domestic Product (GDP) growth for the U.S. is expected to be 2-3% this year and next, while emerging market economies are expected to grow at a rate closer to 5-6%. In fact, per capita GDP growth has doubled in emerging market countries over the last ten years, and emerging markets provided half of the world’s total growth in 2006.
While the U.S. remains an important trading partner to many other countries, some of our major trading partners have developed stronger roles in their own regions. China’s demands have bolstered Asian emerging markets, while developed Europe has become more important to emerging Europe and African economies.
Many fear or lament a diminished role for the U.S. in the global economy, but we believe they are missing several key points. First and foremost, while we must always remain competitive, strong economic growth around the world is a huge plus for U.S. companies and U.S. consumers. It expands the market for our goods and services, and provides a source of lower-cost products from overseas (keeping inflation down and increasing our buying power).
Second, the world’s economies and financial markets are becoming less dependent on the economic health of the U.S., a positive development for the global markets. Stronger consumer demand and economic expansion abroad can pick up the slack when our economy slows, particularly if the deceleration is concentrated in a specific sector like the ongoing correction in the housing market (or the S&L crisis leading to the U.S. recession of 1991). Indeed, the slowdown of the U.S. economy earlier this year did not have a materially negative impact on the U.S. or foreign stock markets, largely because of the strength of the overall global economy.
So, too, strength in economies outside the U.S. has benefited investors with foreign equity exposure in their portfolios. (It’s also boosted the stocks of U.S. companies that have prospered from business activities overseas.) Higher growth rates abroad suggests that attractive opportunities may continue to be found in foreign equity markets.
At Westmount we have always provided our clients with meaningful exposure to quality stocks around the globe, and our allocation to stocks outside the U.S. has been increasing over the years (including another increase at the beginning of this year). As long as these economic trends continue, and outstanding companies can be purchased at reasonable prices, we expect our foreign stock allocation to rise even more in the future.
