22nd May 2017
Erika Mesmer, Client Relationship Manager
Investors investing in global equities do this generally for diversification purposes and to participate in equity markets worldwide. To define the investment universe a benchmark is chosen, which is also used as indicator of the evolution of world markets.
Today the most used index for global equities is the MSCI World, which was launched in 1970. Looking at its composition, the United States represents 60% of the total index. Passive investors replicating the index will therefore be heavily exposed to one single market. They are hence probably not as globally diversified as they initially aimed for. Active investors, who for risk control purposes diversify into other markets, face the risk to miss out on performance when the US markets rallies. This was for example the case in 2016.
Looking back three decades, Japan represented as much as 40% of the MSCI World Index. From that high in the late eighties, Japan stock markets collapsed and for many years remained a market moving mainly sideways, with little growth. Today Japan represents 8.5% in the MSCI World Index.
What about the future? Is the US likely to collapse like Japan did? We believe not.
However we believe that over the decades to come the US will lose its relative strength in the world index. This, we think, will happen progressively over time. Will benefit from this movement all other equity markets: Europe and Japan, but also Emerging Markets.
Passive investors will suffer from this, as they will simply endure the relative weakening of the US. As active investors we are convinced that it is important to truly diversify investments in all regions, regardless of the index composition. Today already we strongly underweight the US, currently favouring Europe, region we believe will surprise in the years to come.
Curious to read more about this subject? The Economist published in its edition of April 8th, 2017 an interesting article “America’s disproportionate weight in global stock market indices”, which covers other aspects and arguments related to this topic.