Home-country bias: still pervasive, still limiting
Hybrid funds invest in a mix of equity and bond funds. Unfortunately, that most closely reflects the opportunity set available to investors in 1970 when the U.S. made up 66% of the global investable opportunity set!2 At the end of 2014, the U.S. made up only 52% while Non-U.S. Developed Markets made up 37% and Emerging Markets 11%.3 Which raises the question, “how can we help investors take full advantage of the global opportunity that exists?” At Russell, we believe global diversification should be an integral part of an investor's portfolio. We have shared some reasons here. In this post, I’ll share some additional factors affecting the global landscape that I hope will bring this global opportunity to life for investors.
Future opportunities may lie where population and productivity intersectSource: “2012 World Population Data Sheet”, Population Reference Bureau. Did you know that there are more people living inside the orange circle in the map above than outside of it? All of North America, South America, Africa, Australia and Europe combined have fewer people than this circle. China is the world’s most populous country with 1.36 billion people. India has the next largest population – 1.25 billion. The United States is the third most populous country, with 316 million people.4 Put another way, China and India combined account for 37% percent of the world’s population. To get to 50%, you simply need to add the three largest metro areas in the world – Tokyo, Japan (37 million people); Jakarta, Indonesia (26 million people); and Seoul, South Korea (23 million people).5 My beloved New York City only lands the number eight spot globally! That said, it’s important to bear in mind that population does not equal gross domestic product (GDP) – the total market value of all the final goods and services produced within a country in a year. Labor productivity is an important factor in creating opportunities, too. Those nations with large and productive populations tend to expand the economic opportunity available to investors globally.
Gross domestic product, current prices (U.S. dollars). Of course, the country at the top of most everyone’s mind when “emerging markets growth” is mentioned, is China. Indeed, as the world’s second largest economy (behind the U.S.) China is a major contributor to emerging market – and global – growth. But lately, I’ve been getting questions from investors about how slowing growth in China may impact global economic growth. It is true: the days of double-digit GDP growth that we saw last decade in China have tempered. But, “slowing growth” is a relative matter. Consider that in 2000 the Chinese economy was just over $1 trillion in size. By 2013, Chinese GDP had crossed $9 trillion.6 Growing anything at the same rate once it’s gotten 10x bigger is hard! And keep in mind that, although China’s growth was “only” mid-single digits (7.4%) in 2014, that’s still considerably faster growth than what the U.S. (2.4%) and the Euro Area (0.8%) posted last year.7 Even with China growing at a slower pace than it did last decade, emerging markets remain an important catalyst for global growth.