Tuesday, November 16, 2010

China, Ireland, Spain, Greece - Uniquely Looking at the World Map

How should we view the world economy? The rise of China and decline of the United States seems to be prevalent in the news recently. Fears of Ireland are a hot topic. Months ago Greece was worrisome. Spain's fate was in question at sometime as well. Statistics don't help either. Population growth, GDP, trade balances, etc. - how can we determine what the world map looks like?

Viewing the world map by relative market capitalization illustrates the importance of building a globally diversified portfolio and avoiding biases that may arise from attention to other economic statistics.


This cartogram depicts the world not according to land mass, but by the size of each country’s stock market relative to the world’s total market value.

Population, gross domestic product, exports, and other economic measures may influence where people invest. But the map offers a different way to view the universe of equity investment opportunities. If markets are efficient, global capital will migrate to destinations offering the most attractive risk-adjusted expected returns. Therefore, the relative size and growth of markets may help in assessing the political, economic, and financial forces at work in countries.

The cartogram brings into sharp relief the investible opportunity of each country relative to the world. For example, China and Spain have a slight larger market capitalization than Microsoft! Greece is virtually non-existent. The world map avoids distortions that may be created or implied by attention to economic or fundamental statistics, such as population, consumption, trade balances, or GDP.

By focusing on an investment metric rather than on economic reports, the chart further reinforces the need for a disciplined, strategic approach to global asset allocation. Of course, the investment world is in motion, and these proportions will change over time as capital flows to markets offering the most attractive returns.

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