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Sep 25, 2024 9:28 PM
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The Great Rotation (Part 2) The United States’ outsize weighting in commercial indices appears unjustified by its share of global GDP. By: Brian Chingono |
In the first part of this series, we argued that the 63% weighting of the United States in global commercial indices like the MSCI ACWI is driven by expensive valuations and higher proportions of free float in the US. And when considering developed markets only, the US allocation jumps to a whopping 70%.
Today, we extend this research by looking at the long-term history of financial markets.
For historical context, we can start by looking at the 124 years since 1900, as shown in the chart below from the UBS Global Investment Returns Yearbook 2024. Today’s 63% allocation to the US appears to be the highest weighting since the “Nifty Fifty” era in the 1960s and early 1970s. Over the past 17 years since the 2008 financial crisis, the US allocation has steadily increased from 41% in July 2008 to 63% in September 2024.
Figure 1: The Evolution of Equity Markets Over Time (1900 – 2023) |
Sources: Elroy Dimson, Paul Marsh and Mike Staunton, DMS Database 2024 and FTSE Russell All-World Index Series weights (recent years). As was the case in the Nifty Fifty era, today’s US technology giants are considered high-quality firms that “must” be owned in an equity portfolio. But the previous era of “must-own” stocks was followed by a long bear market in the United States. From January 1973 to June 1982, US stocks underperformed cash (as measured by T-Bills) by 3.7% per year, according to data from Ken French. When the United States last exceeded 60% of global market capitalization in the 1960s, the US economy accounted for 40% of global GDP. Today, the US is similarly overrepresented in global market capitalization, but it only accounts for 26% of global GDP. Since equity ownership represents a share in economic activity, there appears to be a disconnect between the United States’ share of global market cap sitting near a six-decade high at 63%, while its share of global economic output is near a six-decade low at 26%. Figure 2: United States Share of Global GDP (1960 – 2023) |
Source: World Bank Development Indicators. In our opinion, index followers who assign 63% of market value to 26% of economic output must be willing to overpay for income that’s generated in the United States. And today’s overpayment is arguably more extreme than the 1960s, when America’s share of global economic output was 18 percentage points higher at 38% on average. As detailed in the first part of our series, we believe investors would be better positioned to meet their long-term return objectives by holding a more balanced allocation between the US and international regions than global indices provide. |
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Disclaimers: This does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. This information generated by the charts, tables, and graphs presented herein is for general informational and general comparative purposes only. This document may contain forward-looking statements that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable, however, such statements necessarily involve risks, uncertainties and assumptions, and investors may not put undue reliance on any of these statements. References to indices or benchmarks herein are for informational and general comparative purposes only. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. The information in this presentation is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice or investment recommendations. Each recipient should consult its own tax, legal, accounting, financial, or other advisors about the issues discussed herein. |