Visualizing the World’s Biggest Trading Bloc

When we’re in our comfort zone, we’re more likely to feel safe and familiar – and the same psychological effect also plays into deciding where to invest. In fact, it is common knowledge that investors tend to invest in their home country rather than a more global perspective, a behavior known as home bias.

However, investors might consider expanding their geographic exposure. From Shanghai to London, 20 stock exchanges in the world have a market capitalization of over $ 1 trillion.

This infographic from MSCI shows the opportunities for international equity investments. Let’s dive into some of the key concepts covered in visualization.

Take correlations into account

First of all, by looking abroad, investors may be able to add markets to their portfolio that have a relatively low correlation with their home market. This means that market movements are not as closely aligned and markets may behave differently.

For example, the US has different correlations with the international stock markets. A correlation of 0 means that there is no relationship between market movements, while a correlation of 1 indicates that they are moving in the same direction by the exact same percentage.

country	Correlation with the US market
Japan	0.11
Taiwan	0.21
Korea	0.24
China	0.43
United Kingdom	0.58
France	0.59

Daily correlations based on data from December 31, 2015 to December 31, 2020.

In the past, adding less correlated markets to a portfolio has helped reduce overall volatility.

Manage potential concentration risks

Technology companies have gained dominance in the major US stock indices due to their strong performance. In the MSCI USA Index, for example, the weighting of FAANG shares has increased from approx. 8th% in 2019 to more than 16% in 2021.

This increased concentration means that more of the performance and risk of each index can be determined by this small number of stocks. Geographical ramifications can help reduce this concentration risk.

Access to alternative sources of income

Investors focused in the US may find that their exposure to income and potential growth from other regions is limited. For example only 31% of the MSCI USA Index’s return exposure comes from areas outside of North America.

On the other hand, the MSCI All Country World Index heads roughly 70% its revenue risk from regions outside of North America. As investors move towards a more global portfolio, they increase their exposure to income and potential growth from other regions.

Benefit from economic growth from other regions

While GDP growth was more constant in the industrialized countries, growth was higher in the emerging countries. For example, emerging economies typically experience higher GDP growth as they move to developed countries with higher living standards.

Here are historical and projected data for different regions based on average annual GDP growth.

Historical and forecast GDP growth by region

	2001-2020	2021P-2025P
Europe	1.45%	2.82%
North America	1.63%	2.84%
Pacific	2.52%	2.80%
world	3.33%	4.12%
Emerging markets	5.12%	5.10%

Note: Projections as of April 2021. The Pacific region includes Japan, Hong Kong, Singapore, Australia, and New Zealand.

Emerging markets have historically posted GDP growth that has outpaced other regions, and the International Monetary Fund predicts that they will continue to outperform.

Increase commitment to innovation

Thematic investing is one way to get involved in innovation and international investing is another potential method.

Innovation goes far beyond Silicon Valley and is heating up abroad. In fact about 70% of all R&D spending in 2018 came from outside North America. Israel, Korea and Taiwan were the largest donors as a percentage of GDP. By participating in international equity investments, investors can try to benefit from new developments.

Access attractive reviews

Emerging markets have an attractive price relative to their return on equity, a measure of a stock’s profitability.

	Price at book value	Return on equity
US	4.4	13.7
Emerging markets	2.0	9.2
Europe & Middle East	1.9	8.5
Pacific	1.6	6.4

Data as of December 2020.

Emerging markets offer the group’s second highest return on equity at a much lower price relative to book value than US stocks. In other words, emerging market stocks offer strong returns for the investor compared to the price paid to buy them.

Broadening horizons through international equity investments

While many investors succumb to home bias, they could consider a wider range of investment options around the world. By participating in international equity investments, investors can:

• The aim is to increase diversification and manage risk
• Seize growth opportunities
• Access to emerging markets

Global markets are changing. As innovation and growth accelerate outside of North America, investors may want to consider new opportunities.

source https://dailyhealthynews.ca/visualizing-the-worlds-biggest-trading-bloc/