MacroResearchBoard

U.S. And China: The Two Global Equity Elephants – February 1, 2021

The dominance of the U.S. equity market in global benchmarks, and China within the EM universe, complicates regional and sectoral equity allocations. Consequently, regional equity allocation depends primarily on two country calls, the U.S. for global investors, and China for EM investors.

A just-published report analyzed this issue at the country and sector levels, and concluded:

• The U.S. equity market is over-represented in the global benchmark relative to its economic size, while the emerging markets and euro area are markedly under-represented.
• Sector composition across and within markets is increasingly concentrated, with the largest sector in several markets accounting for multiples of the market cap of smaller sectors such as real estate, utilities and energy.
• In many markets, key sectors are dominated by just a few major companies, reducing the relevant opportunity set for global equity and asset allocators to generate outperformance.
• All told, performance relative to the global benchmark hinges on only a few major country and sector decisions.

Investors seeking to significantly outperform the global benchmark are forced to take material market and sector risks. However, over the longer term, we expect equity depth and breadth across sectors to increase as the relative valuation and earnings gaps between U.S. and non-U.S. markets gradually narrow.