Slicing Up the Global Equity Pie

Includes: EEM, EFA, IOO
by: James Picerno

The U.S. stock market capitalization, as a share of the global equity market, has fallen to its lowest level since 1995, according to numbers from S&P/Citigroup Global Equity Indices.

As this year dawned, U.S. stocks claimed a 40.6% slice of the global equity pie, down from 43.9% the year before. As recently January 1, 2002, the U.S. share was as high as 57% of global equity cap. Since then, the U.S. slice has slipped each and every year, bringing us to the current 40.6%, which is more or less tied as the lowest with 1995, based on looking at January 1 numbers over the years.

On a relative basis, if the U.S. is down, other markets must be up. The most conspicuous rise comes in the emerging markets, which posted a 10.5% share of the global equity capitalization as this year opened, up sharply from 7.5% a year ago and triple the level in 2002.

Looking more closely on a regional basis around the world, Europe actually eked out a marginal gain while Japan slipped. Asia Pacific ex-Japan moved higher, rising to 6.4% of global equity cap, up from 5.3% a year ago. Latin America continues to rise as well, starting this year at 2.4% vs. 1.6% on January 1, 2007.

What insights should strategic-minded investors draw from these numbers? For starters, it provides a rough estimate of how to allocate a global equity portfolio if you had no particular view on which regions looked more, or less attractive than others.

Alternatively, for those who think they know better than Mr. Market, the numbers provide a rough benchmark for deciding what constitutes over- and underweighting on global equity basis. For those who are so inclined, the numbers may suggest that overweighting the U.S. is starting to make sense while underweighting emerging markets has some merit.

Perhaps, perhaps not. Mr. Market never reveals his plans ahead of time. The past, at least, is as clear as ever.