Time to Change Country Mix in World Market-Cap

The world market capitalization is ever changing as share and market values fluctuate, and the US share is shrinking.

The US market share has been declining steadily in recent years, while other markets have been increasing. Today, the US market (SPY) has declined to less than 41% from nearly 53% as recently as of 2004, according to the S&P “World by the Numbers” report.  In earlier times, the US share was much higher than 53%.

Emerging markets [(VWO) and (EEM)] have been gaining market share notably through the BRIC countries of Brazil (EWZ), Russia (RSX), India (INP), and China (FXI).

Germany (EWG) and Japan (EWJ) have held their own and actually increased their market share since 2004.

This table presents the annual market shares for the US, Japan, Germany, China, India, Brazil and Russia as of January of 2004, 2005, 2006, 2007, 2008 and May 2008.

Note that market share in this case is “free-float” market share, meaning freely investable shares. Free-float excludes shares not available for trading, such as government owned shares.

As of May 2008, world free-float market-cap was about $30.7 trillion versus a total market-cap of about $50.7 trillion. In other words, only about 61% of world total market-cap is considered free-float.

The US share has declined in part because the US market has not appreciated as fast as many other markets, and also because emerging markets have been releasing more shares into the free-float category.

The US share will likely continue to decline as more non-US markets open up their free-float, and perhaps as other markets gain in value at a faster pace.

Consider that 90% of US total market-cap is free-float, whereas only 19% of China’s total market-cap is free-float. China’s free-float market share would quadruple if 90% of its total market-cap were free to float.

Similar but less extreme circumstances exist between other developed market countries and other emerging market countries. For example, Japan and Germany have 75% and 76% of their total market-cap as free-float respectively, while Brazil, Russia and India have 51%, 39% and 31% of their total market-cap in free-float.

The approximate 41% US world market-cap share is in stark contrast to the typical 75% to 85% or higher US weight within the stock allocation of most US investor portfolios.

Those allocations may be suitable and appropriate, but here are some interesting questions to consider:

• Are most US investors aware that they have massively overweighted US stocks versus the US world weight?
• Do most US investors actively feel that US stocks are a better investment return opportunity which they have intentionally overweighted?
• Are most US investors underweight non-US stocks because they are concerned about foreign currency risk exposure of investing in non-US stocks?
• Do most investment advisors inform their clients of world market shares as it may relate to allocation choices, and then make an active and reasoned choice to overweight their US positions?
• Will most US investors continue to hold 75% to 85% or more in US stocks when/if the US world market-cap share falls to 30%?
• As a global citizen in a global investment world, what is the rational country allocation for you?

Comments

[drbagel:]

some interesting question. I wonder what the usual country weight would be for someone in the UK. Do they Massively overweight domestic stocks? I'm sure Dutch investors (or other smaller countries) dont invest 85% in domestic companies.

2008 Jun 22 08:44 AM

[QVM Group:]

my understanding is that the the Holland and Scotland were early global investors in the 1700's. due to the small size of their country, the Dutch have had a necessity to invest globally. due the size of the US markets, the typical US investor has been home market oriented. perhaps a reader with a good economic history background could shed some light on that

2008 Jun 22 09:11 AM

[Learning Curve:]

About the 1700's, previous centuries & subsequent centuries: all the imperial powers have effected a global investment strategy. Globalization is not new. Now, in this country, we have multi-nationals whose principal revenue is derived off shore. It has been ever thus.

2008 Jun 22 11:13 AM

[enzo:]

Do you think that US investors maybe overweighted because there is a lack of information on international companies headquartered overseas? Are the international ETFs focusing on marketing their products appropriately in the US? If that is true, what's the best approach to providing that information?

2008 Jun 22 11:23 AM

[drbagel:]

I think some of the domestic overweight is driven by risk avoidance inherent in the investment industry. While trying to find a 529 plan, I discovered that almost all were 80-100% domestic in their stock allocations. I think these companies chose overly conservative portfolios for their ready made investment options. Why? It seems there is an assumption that consumers who use such products are not smart enough to assume investment risk. I'm not sure.

2008 Jun 22 12:17 PM

[QVM Group:]

Enzo,

The ADRs of foreign companies provide a great deal of information and are the only practical way for most US investors to buy individual securities outside of the US.

The international and global mutual funds and ETFs are marketing well and have been attracting more capital than domestic funds for several years. See my article on money flows to US versus international and global mutual funds

www.qvmgroup.com/inves...

2008 Jun 22 04:58 PM

[David Hunkar:]

I think most investors are heavily weighted in US stocks because they are forced to own them - either thru 52 plans as DrBagel points out, thru 401k or other plans. Or it is just "Financial Advisors" pushing the notion that they must own "US" company stocks because it is patriotic to do so and foreign stocks involve too many risks such as political,currency risk. There are plenty of opportunities outside of US. But most US investors are not aware of them. Somewhere I read an article all of us should go for 50% US and 50% non-US stocks in portfolio allocation.

2008 Jun 23 05:41 PM

[fran:]

like the habitual debtor[ the brother-in-law in the joke], a person with funds avoids encounters with same.

will national FICO scores be the next financial guidepost?? would the USA maintain/sustain a credible score?? will "debtors rehab" be in our future??

will we find the "ENERGY" and "FISCAL" policies necessary?? how often canwe continue to fall off the wagon?

2008 Jun 24 02:46 PM

[Acercher:]

Your articles are consistently among the most interesting on Seeking Alpha. I appreciate the way you marry hard data with a point of view--too many other commentaries have one or the other but not both.

My personal portfolio for equities has been divided about 50/50 for the last couple of years, which I think is nowhere as risky as conventional wisdom would have it, particularly given the secular trend of a declining dollar.

However, I have consistently been troubled by the role of Japan in foreign allocations. Even in your schedule above, Japan has been hovering around 10% for years, yet has truly sucked eggs as an investment. How do you deal with this yourself?

2008 Jun 25 01:40 PM

[QVM Group:]

Acercher -- Japan is a perennial question. I have not overweighted in years, although I continual think it ought to somehow become a success story after decades of squeezing out the excesses of its past bubble.

According to S&P/Cit Global Indices, the PE is on the high side:

globalindices.standard...

This recent article at CNN Money reports a negative economic view by the Japanese government:

Japan's economic outlook dims

Government points to exports, output and corporate profits all slowing down; says economic recovery on 'pause.'

June 16, 2008: 9:37 AM EDT
TOKYO (AP) -- Japan cut its overall economic assessment for the first time in three months on Monday, saying that exports, output and corporate profits are all weakening.

"The economic recovery appears to be pausing (and) weak movements are seen recently," the Cabinet Office said in its monthly economic report for June. The government mentioned only the pause in the economic recovery a month earlier.

The government's increasing pessimism toward corporate performance is a gloomy sign for Japan's economy, which has recovered in recent years mainly due to the robust business sector. A slowdown in the U.S. economy is leading to a decrease in Japanese and Asian exports to the American market, weighing on companies' sales.

The recent surge in energy and raw material prices is also eroding business profits by crimping margins.

Japan's government cut its evaluation of exports and industrial production, saying that both have had "a weak tone recently," as well as downgrading its view on corporate profits.

The Ministry of Finance last week said that Japanese companies' business investment, profits and sales all declined on year during the January-March quarter.

A government official briefing reporters Monday said that corporate capital expenditure trends need to be watched closely.

"Once the U.S economy picks up, which we expect to happen later this year, Japan's economic growth will gain steam as exports should start rising again," he said.

2008 Jun 25 02:05 PM

[buyitcheap:]

Is free float really viable in countries i.e. China and Russia, where the governments could flood the markets with additional shares of state/public owned firms? It seems "float risk" aka dilution, might require some degree of discount on the market accordingly.

2008 Jun 26 06:48 AM

[QVM Group:]

buyitcheap -- interesting point. the risk may go both ways, as we saw in Venezuela, and as we have seen Russia squeeze Shell and BP to sell to government controlled oil companies -- the key is that all of the indexes from MSCI, DJ, S&P and FTSE (the key indexers) use free-float. My point in making that otherwise redundant references is to explain why, for example, China has a smaller country weight globally than Switzerland. Not only are Swiss companies large, but they are very high free-float, while Chinese companies on average are low free-float.

2008 Jun 26 10:36 AM

[tg-2009:]

We need to keep an eye on the acounting system used in third world. What is the valuation of stock in Brazil, for example ? I also suspect how India and China can sustain their econmy when oil price is so high and US in recession ?

2008 Jun 30 09:06 PM