Visualize the world’s largest trading block


When we are in our comfort zones, we are more likely to feel secure and familiar, and that same psychological effect is at play when we choose where to invest. In fact, it is widely believed that investors tend to prefer investing in their home country rather than taking a more holistic perspective, a behavior known as bias at home.

However, investors might consider expanding their geographic exposure. From Shanghai to London, 20 of the world’s stock exchanges have a market capitalization greater than 1000 billion dollars.

This infographic by MSCI highlights the possibilities of investing in international equities. Let’s dive into some of the key concepts covered in visualization.

Take into account correlations

For starters, by looking abroad, investors may be able to include markets in their portfolios that have a relatively low correlation with their home market. This means that market movements are not as closely aligned and markets can behave differently from each other.

For example, the United States has varying degrees of correlation with international stock markets. A correlation of 0 indicates that there is no relationship between market movements, while a correlation of 1 indicates that they are moving exactly the same percentage in the same direction.

Country Correlation with the American market
Japan 0.11
Taiwan 0.21
Korea 0.24
China 0.43
UK 0.58
France 0.59

Daily correlations based on data from December 31, 2015 to December 31, 2020.

In the past, adding less correlated markets to a portfolio has helped reduce overall volatility.

Manage potential concentration risk

Tech companies have become more dominant in major US stock indexes due to their strong performance. In the MSCI USA index, for example, the weighting of FAANG stocks doubled from around 8% in 2019 to more than 16% in 2021.

This increased concentration means that more of the performance and risk of each index can be driven by this small number of stocks. Geographic expansion can help reduce this risk of concentration.

Access other sources of income

Investors who focus on the United States may find that their exposure to income and potential growth in other regions is limited. For example, only 31% of the income exposure of the MSCI USA Index comes from regions outside of North America.

On the other hand, the MSCI All Country World index has drifted around 70% the exposure of its revenues to regions outside of North America. As investors move towards a more global portfolio, they increase their exposure to income and potential growth in other regions.

Gain exposure to economic growth from other regions

While GDP growth in developed economies has been more constant, growth in emerging markets has been higher. For example, emerging markets typically experience higher GDP growth as they transition to industrial economies with higher living standards.

Here is historical and projected data for various regions, based on average annual GDP growth.

Historical and projected growth in GDP by region

2001-2020 2021P-2025P
Europe 1.45% 2.82%
North America 1.63% 2.84%
Peaceful 2.52% 2.80%
World 3.33% 4.12%
Emerging Markets 5.12% 5.10%

Note: Projections from April 2021. Pacific region represents Japan, Hong Kong, Singapore, Australia and New Zealand.

Emerging markets have experienced GDP growth that has outpaced other regions in the past, and the International Monetary Fund predicts that they will continue to experience above-average growth.

Increase exposure to innovation

Thematic investing is one way to gain exposure to innovation, and international investing is another potential method.

Innovation goes far beyond Silicon Valley and intensifies abroad. In fact, more 70% of total R&D spending in 2018 came from outside of North America. Israel, Korea and Taiwan were the top spenders as a percentage of GDP. By participating in international equity investments, investors can aim to capitalize on new developments.

Access attractive valuations

Emerging markets are attractively priced relative to their return on equity, a measure of a security’s profitability.

Price at book value Return on equity
we 4.4 13.7
Emerging Markets 2.0 9.2
Europe and Middle East 1.9 8.5
Peaceful 1.6 6.4

Data as of December 2020.

Emerging markets offer the second highest return on equity in the group, at a price to book value well below that of US stocks. In other words, emerging market equities offer investors high returns relative to the price paid to get them.

Broadening horizons with investing in international equities

As many investors succumb to national preference, they might consider a wider range of investment options around the world. By investing in international equities, investors can:

  • Aim to increase diversification and manage risk
  • Take advantage of growth opportunities
  • Access emerging markets

Global markets are changing. As innovation and growth accelerates outside of North America, investors may want to consider new possibilities.

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