A steady growth of the financial markets in the world has occurred since the end of WWII. Since 1950 limiting stock market trading to the US appeared to be preferred option. However, since the failure of US financial markets in 2007 new international investment opportunities become available. The purpose of this blog is to examine the newly emerging options for investor portfolios.
The present capitalization of the world's stock market is about $100 Trillion. Where should an investor diversify their investments? Investment returns for different countries show great variability.
The conventional approach is to purchase US financial assets consisting mostly of domestic stocks and bonds. Until now the US stock market offered the greatest choices because it accounted for up to a third of the total global market capitalization. Alternatives, such as China, Japan, UK, Canada and Switzerland offered only a fraction of the pool available for trading.
The following shows the total market capitalization for the world:
The size of the total global asset pool is only partially related to financial wealth. Real-estate holdings as well as valuables would have to be also included. That will be discussed in future blogs.
With close to 30% of the total market capitalization of the world owned by the US, the next largest opportunities for trading are in China, Japan and UK. All other countries offer only much smaller trading pools.
Another way of viewing trading opportunities is by an examination of the earning capacity, defined as GDP, that supports any financial marketplace. The following is a list of country GDPs:
The US with $20 Trillion of GDP has a smaller share of the total global earning capacity as compared with other countries. The US stock market is over priced as compared with others. By comparison with average Price/Earnings (P/E) ratios, the projected annualized market returns of the US are inferior. The US is the only country with a negative P/E: