The dramatic changes in relative global equity market weights in recent years are summarised below in this illuminating table produced by Bespoke Investment Group. The US market has seen a stunning fall of almost 14% in its global weighting since 2004, while China, despite the slump in Shanghai this year, has more than trebled its share to become the fourth largest market. Brazil has likewise seen its share more than treble to just under 3%, and has done better than much hyped India. Indeed, Brazil has been the best (and indeed most accessible) major emerging market for investors in recent years, rising 266% since January 2004. Among developed markets, only Australia and Canada, both heavily weighted in resource stocks, have significantly increased their relative share. The Middle Eastern markets, buoyed by huge liquidity from booming oil prices, and despite a market crash in 2006/7, have grown several fold in size, but remain tiny in global terms.

How will this list look in few years time? So far in 2008, only a handful of markets have generated positive returns, with China down a stunning 45% as a retail stock market bubble predictably burst (predictable to objective observers at least; most investment bank strategists stayed bullish). I suspect emerging markets in general are in for a rocky ride in the next couple of years as they battle spiralling inflation by driving real interest rates into positive territory and thus squeezing domestic growth. The US will have bounced back a few points in relative importance as it is one of the cheapest markets right now and the dollar is not quite dead, China will certainly be substantially bigger not only because stocks there now look very reasonable value (even on what I believe will be mid to high single digit GDP growth going forward), but also as a function of a dramatically revalued currency and growing access to international investors. HK and particularly Taiwan will benefit by association; the recent outbreak of political detente across the Straits of Formosa is very bullish medium term for the Taiwanese market. Canada, Australia and Brazil offer political stability, strong currencies and good corporate governance and favourably contrast with the institutional corruption that prevails in Russia, but they are equally exposed to a reversal of the current euphoria in commodity markets which I expect imminently; a major sell off would be a medium term buying opportunity. India is my favourite emerging market and after a 25% fall this year looks a bargain as one of the most dynamic emerging markets in both corporate and demographic terms, and could well double in global weight by 2012. Europe and Japan are probably in a secular downtrend in terms of relative global weight, burdened by growing institutional inertia and rapid demographic decline.

Tags for this Post:
Commodities, Market Commentary