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).

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Global equity market breakdown by country and region

Why non-U.S. stocks matter

Global equity market by country and region

Sources: MSCI ACWI Index, International Monetary Fund, World Bank, and Morningstar. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly. Numbers may not add due to rounding.

Recognizable companies carry a certain level of trust and appeal, having woven themselves into the fabric of consumers' lives across generations. But many of these brands, the ones our parents and grandparents might have used, surprisingly hail from outside the United States. On the flip side, several U.S.-origin brands have successfully "transplanted" themselves abroad. This phenomenon challenges the notion that investments must be homegrown.

Among the top 10 global stocks I just mentioned are Apple and Amazon, two highly recognizable American companies. As of September 30, 2023, these two stocks accounted for more than 6% of the MSCI All-Country World Index. For many North American investors, it's second nature to have them in our portfolios. But here's the fascinating twist: in 2022, these companies earned only 40% (Apple) and 61% (Amazon) of their revenue from the United States.1 This makes them truly international players.

Now, take a closer look at the pie chart. Japan represents the second-largest individual country allocation in the market-cap weighted global equity market breakdown. It wasn't always so: in the post-WWII era, Japan was considered an emerging market economy. But things have changed dramatically. Today, we are familiar with names like Toyota, Sony, and Mitsubishi, the top three Japanese stocks by market cap. In 2023, Japan alone constitutes 5.5% of the global equity market.

Toyota is now one of the most dominant global automakers, making Toyota stock an important part of a globally diversified portfolio. Toyota's dominance was built on a reputation for producing high-quality, reliable vehicles. Skipping out on Toyota stock in 2023 means missing out on a stock that, as of the end of Q3 2023, has delivered an impressive 32.3% return.2

While many know Toyota's Japanese origins, it's worth noting there's a multitude of recognizable companies that appear American but actually hail from beyond U.S. borders. The image below features a few companies which likely resonate with most American consumers and investors. Most assume these household names are U.S.-based, but their roots lie in foreign soil. Let's explore how easily you can invest across borders; no passport required!

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Recognizable brands that are based abroad

Crossing the border, no passport required

Recognizable brands that are based abroad

As we appreciate the beauty of the current season, let's relish a delightful memory of warmer days with Ben & Jerry's. Founded in 1978 by Ben Cohen and Jerry Greenfield in 1978 in Vermont, they started with classic vanilla and later introduced favorites like Chunky Money and Cookie Dough. But did you know they create unique flavors for international markets? "Maccha Made in Heaven" for Japan, for instance.

What sets Ben and Jerry's apart isn't just their flavors and unwavering commitment to social responsibility, a trait linked to their brand identity from the beginning. In 1984, they went public with an IPO, remaining independent for 16 years. Then, in 2000, the company was acquired by Unilever, headquartered in the Netherlands, and transitioned ownership abroad. Despite this change, Ben and Jerry's continued championing social causes and environmental sustainability, values close to the hearts of many U.S. consumers and shareholders.

This case highlights that investors have trusted and familiar options when investing across borders. It also illustrates that investing our hard-earned dollars in companies based outside the U.S. doesn't mean the total value of that investment leaves the U.S. In fact, a Ben & Jerry's production plant is still operating in Waterbury, VT, and the company tries to use Vermont-sourced ingredients whenever possible. Likewise, in the case of Toyota, although its home base is in Japan, the company has a substantial manufacturing and production presence in the U.S.

As you relish your favorite ice cream or take a leisurely drive in your trusted Toyota, remember that your investment portfolio does not need a passport to journey across borders and cultures. Recognizable brands have the ability to create a sense of familiarity and make the world of international investments feel closer to your own.

2 Source: Morningstar Direct