It's a Big World

With apologies to Walt Disney, the global economy is getting, well, more global, and, intuitively, companies’ sensitivities to  global macro factors increase in proportion to their global revenues.

When we look at conventional, market-cap weighted indices, we (implicitly) assume that 100% of the each company’s stock price is driven by domestic factors. We know, obviously, that this makes no sense logically for companies that operate globally. For example, when we own Samsung implicitly ascribe 100% of that holding to our Korea exposure. But the company gets less than 10% of its revenue from Korea, and it’s fortunes are dependent on non-Korean factors more than domestic ones. This statement holds true for many multinational corporations.

The chart shows the capitalization weights of the MSCI ACWI versus the revenue exposures of the same ACWI companies. It’s interesting that the differences are almost entirely between the US and EM: Europe, UK, Japan show little change. But the US weight falls in half and the EM weight triples when view by revenue rather than by capitalization.

No benchmark is perfect, but I suspect that over time we will gravitate to evaluating holdings on factors other than solely market capitalization.

• 22 Dec, 2014

  Too Many Words

  Among monetary economists, there is a raging debate over the merits of the Fed's burgeoning balance sheet. Back in ...

• 4 Sep, 2015

  Jobs

  Markets have taken today's employment release as evidence of a weakeningÂjobs market. A mere 173,000 net new jobs ...

• 2 Jun, 2020

  Earthrise or Earthset: Thoughts on a Post-Pandemic World (Part 3)

  Source: NASAWeak economic growth and low investment returns are the prospects we discussed in the first two parts of ...