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.