Why America is still king

The global economic dominance of the US was supposed to be fading by now. But it’s just not happening, says Matthew Lynn.

925_MW_P18_City-View

Amazon's biodomes: America's tech prowess helps it maintain dominance

The dominance of the US was supposed to be fading by now. But it's just not happening.

Rewind a decade and it looked as if US dominance of the global economy was slipping. The financial crisis had been sparked by reckless lending by US banks. The economies of Brazil, Russia, India and China (the Brics), with their huge populations, were industrialising rapidly. The euro was set to challenge the dollar's role in the currency markets, and investors were pouring money into a far more diverse set of assets. If the 20th had been the American century, the 21st looked likely to be far more mixed.

Except it isn't. According to Bespoke, the US now accounts for 39.8% of the total global stockmarket capitalisation, compared with 34.2% back in 2008. That is despite the fact that its share of global GDP is down from 40% half a century ago to less than 20% now. The rest of the world generates a larger and larger share of global output, but in terms of the stockmarket Wall Street is becoming more important, not less.

No other country comes close. Japan only accounts for 7.8% of global market capitalisation, even after a relatively good year for the Tokyo market. That is down from 9.9% a decade ago. The UK, perhaps not very surprisingly given the generally miserable performance of the FTSE, has shrunk from 6.5% to 4.4%, while France has slipped from 4.5% to 3.1%. Germany might be the biggest economy in Europe, but its stockmarket barely registers, accounting for a negligible 2.8%, only around a 15th of the American figure.

Significantly, there are two markets growing in importance China and Hong Kong (its market is largely made up of mainland companies these days). Hong Kong now accounts for 6.8% of global market capitalisation (more than twice Germany's despite having a population of only 7.3 million people), while China accounts for 7.5% of the total, and is closing in fast on Japan. Recalculate the figures in a couple of years' time and China will probably be in second place. India's share is up slightly, but it is still a relatively tiny 2.7%. The other two Brics, Russia and Brazil, are both falling down the league table and account for around a single percentage point each.

America's entrepreneurial verve

And it's is not just the stockmarket. The dollar still accounts for more than 60% of global currency reserves, and it still dominates international currency transactions. Meanwhile, the US is growing far faster than any other major developed economy, expanding at a rate of 3.5% annually, and the Federal Reserve is the only significant central bank to be in a position to raise interest rates.

Of course, the US has been helped by its bull market, and also by the incredible success of its technology companies. A couple of trillion-dollar monsters such as Amazon and Apple helps generate a lot of stockmarket capitalisation. But there is more to it than that. The US has recovered a lot of its entrepreneurial verve in the last decade. It recovered from the crash more quickly than any other economy, and its venture capitalists have been better at exploiting the power of the internet to create new businesses than any of their rivals elsewhere. Donald Trump's radical tax changes are likely to fuel further growth. Meanwhile, most of Europe remains as stagnant as ever; and Russia and Brazil show no signs of living up to their potential.

There are two important points for investors. First, global equity markets are still overwhelming dominated by the US. What happens on Wall Street will determine what happens to the rest of the world. There is no point in thinking you can diversify away from it because it is not going to work. Second, the only real challenge is coming from China and Hong Kong. Chinese growth remains impressive, but has yet to have a meaningful impact on global stockmarkets it now accounts for 18% of global GDP, and may well match the US very soon, but the Shanghai stockmarket is still a long way behind New York. Other countries are a sideshow. It is what happens in the US, and in the US alone, that counts for global returns. And that is more true now than ever.

Recommended

How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021
The charts that matter: bond yields turn back up and a new bitcoin record
Global Economy

The charts that matter: bond yields turn back up and a new bitcoin record

Bitcoin hit a new all-time high, while government bond yields turned back up. Here’s how that has affected the charts that matter most to the global e…
23 Oct 2021
Green finance is set to be the most powerful financial repression tool yet
Bonds

Green finance is set to be the most powerful financial repression tool yet

The government has launched its “green savings bond” that offers investors just 0.65%. But that pitiful return is in many ways the point of “green” fi…
22 Oct 2021
Andrew Hunt: why it's a great time to be a deep value investor
Value investing

Andrew Hunt: why it's a great time to be a deep value investor

Merryn talks to Andrew Hunt, author of Better Value Investing, about his adventures in the market's dark underbelly, looking for the hated and neglec…
22 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021