Our last blog series, Will that Be US Again? looked at the place of the U.S. in the world and some of the challenges we face. In this posting, we’ll look at what these changes to the global economy and markets mean to us as investors.
Technology has accelerated the interconnectedness of the world in terms of trade and investment, giving companies access to opportunities across the globe. Most of us know that we buy lots of things that are made overseas and from companies domiciled overseas. But it goes for U.S. companies as well. The days when corporate America generated all of its revenues stateside are long gone. In 2010, 46.3% of the revenues of companies in the S&P 500 (reporting foreign sales) were generated outside the U.S., up from about 30% a decade ago. We especially sell technology overseas—56% of IT sales were foreign.1 So even if you just invest in U.S. companies, you are likely getting substantial exposure to growth worldwide.
More countries are becoming more advanced, as per capita incomes are rising and political and financial systems are maturing and becoming more and more stable. The latest World Economic Outlook from the International Monetary Fund forecasts 5.4% growth for emerging and developing economies this year after 6.2% growth in 2011.2Advanced economies’ more muted projections call for 1.2% growth in 2012 after 1.6% last year. The growth projections chart below from JP Morgan Asset Management depicts something similar in graphic form.
What does this mean for investors? It means investors have the opportunity to invest in companies and markets around the world as those markets grow to represent more of the world’s total. The chart below from our friends at Dimensional Fund Advisors illustrates the changing landscape of global stock markets. Just 20 years ago, emerging markets represented less than 1% of total world market capitalization. Today that number stands at 12.28% (after peaking at 13.64%). The U.S. share of world market cap peaked at 54.60% in 2002, only to fall to 47.04% today.3
The explosive growth in overseas markets, especially emerging, has made the traditional S&P 500/ BC Aggregate portfolio a thing of the past. While we retain a U.S. bias given that we live in a dollar-based economy, our portfolios have substantial exposure to international developed and emerging markets stocks and bonds, reflecting the new reality in world economies and markets.