Finance professor Jeremy Siegel has studied global stock markets spanning centuries not just years and decades. His Stocks for the Long Run (see link below), now in its 4th edition, is an investment classic. Most investing and financial books aren't worth the paper they're printed on and many can do their readers harm. Siegels' book is the rare exception and among a handful of investing books worthy of your time to read and digest.
Chapter 10 of his latest edition is entitled, "Global Investing and the Rise of China, India, and the Emerging Markets. Here's a summary of the key insights and recommendations from this important chapter:
- Financial markets are now clearly globalized. The United States is no longer the "unchallenged giant" but is now one of many countries that offer wealth building opportunities to investors. About 90 percent of the value of all stocks worldwide resided in the U.S. just after World War II. Today, that percentage is less than 50 and the portion is continuing to shrink. "To invest only in the United States is to ignore the majority of the world's equity capital."
- The developed world (U.S., Canada, Western Europe, Japan, Australia, New Zealand, Singapore, South Korea, Taiwan and Hong Kong) are still overrepresented economically and in the world's stock markets. While these countries contain just 15 percent of the world's population, they account for over 50 percent of the world's economic activity and over 93 percent of the world's equity capital.
- "The emerging nations' share of output and equity capital has been rising rapidly and will continue to do so...and market capitalism will push countries such as China and India to the forefront of the world economy."
- While world markets have tended to move more in tandem in recent years, especially over shorter time periods, investing opportunities outside the U.S. provide investors greater ability to diversify and spread risk. Historic data suggests that investors can minimize risk and maximize returns with about 30 to 50 percent of their stock portfolio invested outside of the U.S.
- When investing overseas, investors gain diversification exposure to currencies beyond the U.S. dollar but also are exposed to the risks of investing in stocks denominated in other currencies. "...for investors with long-term horizons, hedging currency risk in foreign stock markets is not important...it is not worth the cost..."
- Economic historians have shown that during the 17th and 18th centuries, China and India accounted for roughly one-third of world economic activity and were powerhouses. Siegel predicts that by 2050, these two countries will again account for about that amount of world GDP - he predicts 38 percent (it's currently 22 percent) and will account for about 36 percent of world stock market values (versus the current portion of just 2 percent). Siegel warns, however, "...the increase in a country's share of world capital...does not necessarily represent capital appreciation of existing shares. Rather, most of the increases come from the floatation of new capital as well as the acquisition of old capital...economic growth does not guarantee good returns..."
- Conclusion: "Only those investors who have a fully diversified world portfolio will be able to reap the best returns with the lowest risk."