Which market are you really buying?

on Wednesday, 4 December 2013. Posted in ,
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When is a British listed company actually providing British income?  Not that often it seems.  Today’s note is based on The Economist’s very interesting graphic in the most recent issue on comparing the geographic source of income for each stock market.  If you have been seeking exact geographic exposure with funds, it seems you are likely failing.  Europe is, unsurprisingly given the number of countries in close proximity, very international from a revenue perspective.

Economist - Geographic Source of Income

This is apparent in many ways in many markets.  I’ve had clients request the Middle East markets since they want correlation with oil, although none of the state owned behemoths have a state listing.  The link to oil from what you actually buy is rather tenuous.  I’ve had people not choose a Singapore index fund “because it was too boring” unlike Thailand which was more interesting.  That’s despite the revenue for Singapore listed companies being only 40% in Singapore.

The smaller the country, the more “pure” it might be.  What international company lists in Mongolia because it is an international capital hub?  Not many to be sure.  International financial hubs are likely to be outliers, but it is still true of many major markets.  Trading liquidity is attractive and has strong network effects.

Singapore Income by Geography

This phenomenon is well worth understanding given the strong run of the US market over the last 12 months.  Global strength, not just US recovery, is likely to play a role.  The future price level of the US stock market, and many markets it seems, bears little relationship with the health of their respective economies.

That’s some food for thought in designing your portfolio.

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