By David Haviland, Beaumont Capital Management
Today, our world shares a global economy. While the United States still has the largest economy with an $18 trillion Gross Domestic Product1 (GDP), many are surprised to learn that we are now less than one quarter of the world’s economy (versus 40% of the world’s GDP in 19602). When investing, does it make sense to ignore 75% of the world’s GDP?
Largest Economies by GDP3
Another thought is that multinational companies blur the lines between a domestic versus a global economy. Dr. James Glatfelter at the New Scientist pointed out in a 10/22/11 Forbes article that 737 companies control about 80% of the global economy. In a 9/17/16 Economist article, The McKinsey Global Institute confirmed that only 10% of the world’s public companies generate 80% of all profits. While this may be an alarming statistic, the point is that national borders are now a poor delineator of employee location, sales and corporate profit.
In addition to the size of the rest of the world’s economy, many countries’ GDP growth rates are higher than in the U.S. These higher growth rates, especially in emerging markets, have provided great opportunities in the past and should continue to do so over time. When investing, does it make sense to ignore GDP growth rates that are 2-3 times higher than here in the U.S.?
Regional growth rates vary, with South Asia and Sub-Saharan Africa leading the pack.4
The periodic table below shows some interesting patterns (please see red boxes). While we do not espouse market timing, taking advantage of trends can make sense.
Periodic Table of Returns by Asset Class as of 12/31/165
To further this thought, it is important to recognize that stock leadership is cyclical. During the 2009-2016 bull market, U.S. equities enjoyed one of the longest periods of outperformance (versus their international counterparts) since World War II. However, half way through 2017, this trend has reversed and both developed and emerging markets have outperformed their U.S. counterparts. This often leads to sustained periods of outperformance and it appears to be international’s turn. When building a portfolio, does it make sense to ignore long term trends and opportunities?
International and global investments can take advantage of opportunities present in other parts of the world, often in areas with higher GDP growth rates. In addition to these growth prospects, the cyclical nature of the markets can provide even more opportunity. Simply embracing the global economy and investing accordingly can provide real value over time.
1Source: World Development Indicators database, World Bank, February 1, 2017, World Economic Forum March 9, 2017. https://www.weforum.org/agenda/2017/03/worlds-biggest-economies-in-2017/
2Source: Forbes – U.S. Role In Global Economy Declines Nearly 50% by Mike Patton; February 29, 2016
3Source: World Development Indicators database; March 9, 2017.
4Source: International Monetary Fund World Economic Outlook (October 2015 and January 2016); A.T. Kearney analysis
GDP figures are the unweighted average of the forecast annual growth rates of the economies within each region between 2016 and 202. GDP growth is measured at constant prices.
5Source: Bloomberg; Beaumont Capital Management, as of 12/31/16.
Investment returns for each asset class are represented by the following indices: U.S. Equities – S&P 500® Index; International Developed Equities – MSCI World ex-U.S. Index; Emerging Market Equities – MSCI Emerging Market Index; U.S. Fixed Income – Bloomberg Barclay’s U.S. Aggregate Bond Index; International Sovereign Fixed Income – Barclay’s Global Treasury ex-U.S. Index.
6Source: Bloomberg, O’Shares. Data as of 3/31/2017. International: MSCI EAFE Index, U.S.: S&P 500; Rolling 3-year return differential using monthly data.
As with all investments, there are associated inherent risks including loss of principal. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector investments concentrate in a particular industry, and the investments’ performance could depend heavily on the performance of that industry and be more volatile than the performance of less concentrated investment options. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The risks are particularly significant for ETFs that focus on a single country or region. The ETF may have additional volatility because it may be comprised significantly of assets in securities of a small number of individual issuers.
Past performance is no guarantee of future results. One cannot invest directly in an index. Indices are not managed and do not incur fees or expenses.
The Standard & Poor’s (S&P) Large-Cap 500® Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. The MSCI World ex-U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries -excluding the US. The MSCI Emerging Markets Index captures large and mid-cap representation across 23 Emerging Markets (EM) countries. The Barclays Capital US Aggregate Bond Index is a market capitalization-weighted index of investment-grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. Barclays Global Treasury ex US: subgroup of the Barclays Global Treasury Index that tracks fixed-rate local currency sovereign debt of investment grade countries outside the United States. All issues must be fixed rate, nonconvertible debt and have at least one year remaining to maturity.
“S&P 500®” is a registered mark of Standard & Poor’s Financial Services, LLC a division of McGraw Hill Financial, Inc. All index names of the Barclays indices are trademarks of Barclays Bank PLC. MSCI is the trademark of MSCI Inc. and/or its subsidiaries.
This material is provided for informational purposes only and should not be taken as investment advice. Each client has their own unique circumstances and the investment themes described above may not be appropriate for all investors.
The material may contain forward or backward-looking statements regarding intent, beliefs regarding current or past expectations. Any conclusions or assumptions described are to illustrate potential benefits, however are not guaranteed.
Beaumont Capital Management is a separate division of Beaumont Financial Partners, LLC. 250 1st Avenue, Needham, MA 02494. 844-401-7699
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