Investing beyond the US

At the start of the 20th century, one stock market stood head-and-shoulders above the rest. Britain was the centre of global investment, accounting for fully one-quarter of the value of stock markets worldwide. The US represented 15%. Now, the US stock market is by far the world’s largest: its value accounts for more than half the global total. In second place is Japan and Britain accounts for a much-diminished 5.5%.

In the 119 years since 1900, the US economy has grown more strongly than the rest of the world. But the US dominance of the world’s markets carries with it the danger that too much is inferred about the performance of equities globally from what has happened in this one country. There is, after all, an investment world beyond the US borders.

IPOs and the growth of the US economy over the past 119 years have played their part in boosting the size of the country's equities market. Nevertheless, the returns on American equities have been an important contributor. They have been strong both in nominal terms and after taking inflation into account: in real terms, returns from US equities, at an annualised 6.4%, were far higher than those on bonds or bills.

But equities in some other markets have done better. In real, local currency terms, the US was beaten by Australia and South Africa. Furthermore, the returns from equities in the US weren’t vastly higher than those in the rest of the world: excluding the US, equities returned an annualised 4.3%. A striking factor is also that the best-performing equity markets over the past 119 years tended to be in resource-rich and/or New World countries.

Now let’s look at the more recent past. What has happened since 1980? It is no longer sufficient for investors to concentrate only on developed markets. The shape of the global economy has changed.  So has the shape of the potential investment universe.