It Really IS a Small World

Worldwide interconnectedness not only connects us socially, but also politically, economically, financially, culturally, medically and technologically.

Searchamelia; it is a small world

As the world is getting smaller, questions beg for answers.

Living in an age of jet travel, the internet and mobile communication have their advantages. They make our world of 7 billion people seem a bit smaller since we’re just one plane ride or one “click of the mouse” away from connecting with anyone in the world.

But, along with the good comes the bad.
Worldwide interconnectedness not only connects us socially, it also connects us economically. What happens in China, for example, doesn’t necessarily stay in China. A collapse of their real estate market or a revolt against the government could have repercussions around the world.

A bit closer to home, the sovereign debt problems in Europe are helping keep a lid on stock prices in the U.S., according to MarketWatch. As the debt problem spreads from the peripheral euro-zone countries to the core in Germany – which had a failed bond auction last week — the U.S. is also caught in the cross fire.
What’s disappointing about being joined at the hip with Europe is that the U.S. economy is actually performing okay.

Consider these positive points:

  • • Our trade deficit declined for the third month in September, thanks to rising exports.
  • • Industrial production rose strongly in October.
  • • Residential building improvements are touching record highs.
  • • October car sales hit the highest level since February.
  • • Consumer sentiment in November rose to the highest level since June, according to data from the University of Michigan and Thomson Reuters.
  • • Personal income in October showed the largest increase since March.
  • • Black Friday sales rose sharply from a year ago.

Sources: Economist; MarketWatch

Of course we have to take into consideration that these improvements are coming off a low base and are so fragile that this modest recovery in the U.S. could get derailed if the euro-zone situation continues to deteriorate. Our small world is now focused on Europe and whether it can pull out of its debt debacle. Time to do so is running out for our friends across the pond.

DOES IT MAKE SENSE to invest outside of the United States? The concept of diversification suggests that you own a diverse group of investments that have uncorrelated return characteristics. One of these diverse groups of investments could include non-U.S. stocks. That might make sense because, as the following chart shows, the U.S. stock market captures only 29% of worldwide stock market value based on market capitalization.Global Market Caps

The above chart shows some interesting trends:

  • • The U.S. is still, by far, the single largest market in the world, but it has declined substantially in the past five years.
  • • China has catapulted to second place with dramatic growth in the past five years.
  • • Japan, UK, France, and Germany join the U.S. as developed countries that have lost ground over the past five years.
  • • Emerging countries such as Hong Kong (technically of course part of China), India, and Brazil have shown strong relative growth.
  • • Although not shown on the chart, back in the late 1980s, Japan’s stock market represented 45 percent of world equity market capitalization. Now, it’s less than 8 percent due to a 20-year bear market.

As the world turns from developed countries to emerging ones, we should all keep our eyes open and our pencils sharpened for the investment opportunities that might arise beyond our borders.

1 Comment

  1. Anonymous

    Interesting to note that Bespoke still lists Hong Kong as a separate entity, while technically it is now part of China, which changes the China part of the pie to 12.75% with an 8.42% increase over the past 5 year!!

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