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The World is Upside Down

I just returned from lunch and a discussion with a colleague from the economics department about China.  This discussion began due to my telling him about our work in China and a presentation we heard at yesterday’s Personal Finance Symposium IV.   Margie Carpenter, CFP®, CIMA® a financial planner with Bell Tower Advisors, LLC presented her research on “Allocating to Emerging Market Equities: Why, How, and How Much”.  I will try to introduce some of her work here.  (All facts are referenced in her PowerPoint which is online here.)

To begin, think about the world in 1900.  At that time, the entire market capitalization of the world, the total value of all the publicly traded corporations, was $18 billion.  The United States of America represented a mere 18% of the total.  By the year 1985, the United States’ success as an economic power grew to 66% of the world’s total market capitalization of $2 trillion.

However, by the year 1995, the share of the world’s total market capitalization of $15.6 trillion had fallen to 55% – from 66%.  Continuing this trend, by 2010, the market capitalization of the world had grown to $47 trillion and the share represented by the United States continued its downward trend to 32%.  By the year 2030, Goldman Sachs predicts this will fall to 25%, while Jeremy Siegel says it will fall to 17% by 2050.

Graphically, this looks like this:


Why do you care?

Most of the growth in the world is also expected to occur outside of our 50 states. Currently, Asia accounts for 46% of the composition of the world’s Gross Domestic Product (GDP) growth.  The International Monetary Fund predicts this will change to 53% over the period 2012-2016 and, by the year 2015, there will be seventeen economies with a GDP of over $1 trillion.  Clearly, the lead we have enjoyed as citizens of the United States is disappearing.

This is not dismal, however.  Many of these lesser developed countries are able to grow much faster, because they are beginning from a relatively meager base.  They can grow faster while remaining behind the United States in development.  Yet, growth is a key to earnings and earnings are a key to the value of companies.  What does this mean for you, the twenty-first century investor?  (Regardless of your age, you are a 21st century investor.)

First, we must reconsider our asset allocations to include more investments outside of the United States.  Many people have a home country bias that they need to examine and find value and growth where it is most likely to be found.  Ms. Carpenter asks us to consider reconstructing our equity allocations to a regional approach where the Americas, both North and South) would receive 45% of our investments, Asia would receive 32%, Europe 20% and Other only 3% (mostly the Middle East and Africa).  If we did this, our equity ownership would reflect the “ownership” of the world.

Admittedly, this is contrary to many people’s sense of patriotism.  We also know that many US companies, such as Coca-Cola and McDonald’s, are rapidly growing their sales overseas.   Thus, we’ve many threads in this weave we call ourselves and our world.  The point is, however, that the world is changing and we have a primary responsibility to the financial success of our families.  It is my belief that the success of our families adds together to become the success of our country, as well as our world.  And, yes, the times they are a changin’.