Navigating Global Equity Markets

Executive summary:

  • Global investing is easily accessible through the financial markets.
  • Many investors prefer to stick to companies and industries they are familiar with.
  • But companies that may be considered "American" may be headquartered elsewhere. And even companies based in the U.S. may derive most of their revenues internationally.
  • Investing in only U.S. companies may limit an investor's options.

Global investing is a time-tested concept that got a major impetus during the exploration era when British, French, Spanish, and Dutch sailors forged trade routes across the oceans. This laid the foundation for today's North American economy. Fast forward to the present, and global investing is accessible to all through the financial markets – no need for galleons!

But many people hesitate to invest in companies outside their own borders. They prefer the names and industries they know and are familiar with. This is a well-known behavioral trait among investors, often referred to as "home country bias."

For U.S. investors, this bias can be limiting, considering that the U.S. comprises just 15.4% of global GDP (gross domestic product) and 4% of the global population while representing 62% of global market capitalization. In simpler terms, more than 96% of the world's population lives outside the U.S., and over 84% of global GDP is generated elsewhere. This stark contrast presents untapped potential for U.S. investors.

Look at the pie chart below, and you'll notice the U.S. has a commanding presence in the capital markets. The top 10 market-weighted stocks are U.S.-based, collectively accounting for about 18% of global equities – surpassing the entire EMEA region! It's understandable why many U.S. investors might favor U.S. stocks, even if U.S. large cap companies hadn't been the top performers over the past decade. (Remember, however, that past performance is no guarantee of future performance).

Global equity market breakdown by country and region