Global Stocks — Market Cap vs. Revenue Exposure

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SimpleGift
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Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift » Thu Sep 17, 2015 5:15 pm

As companies worldwide generate more and more of their revenues beyond their home country-of-domicile, there's an increasing disparity between the capitalization weights of the indexes in which we invest and the economic exposure of these indexes. This post summarizes the latest data published by MSCI on the revenue exposure of various cap-weighted indexes, all from October 2014.

This first chart compares the regional cap-weights of the MSCI All-Cap World Index with its revenue exposure. Most notable for global market-weight investors, though the U.S. and Canada make up 53% of index market cap, they generate only 31% of index revenues. In contrast, emerging markets make up only 11% of market cap, but produce 35% of revenues.
This second chart details the revenue exposure of the various MSCI regional indexes. For example, an investor with 100% allocation to the MSCI Europe Index would only be 50% exposed to Europe by revenue, and 18% exposed to North America, 5% to the Pacific region and 27% to emerging markets. It's also somewhat surprising that such a large portion of revenues for the Emerging Markets Index (82%) come from other emerging markets — with not much developed market penetration.
If investors are interested in the regional revenue exposure of their own equity allocations, we had a post last year that detailed the economic exposure of various portfolio mixes of U.S. and international indexes, found in this thread.
Cordially, Todd

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by RadAudit » Thu Sep 17, 2015 6:17 pm

Interesting info. Thanks for the post.

Isn't a market return based on the cap weighted returns of the companies in that market? So, US market returns are based on cap weights not revenue exposure. If that is true, I don't see the advantage of going to a revenue exposure based portfolio if I wanted to achieve market returns.

But, I could be wrong.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift » Thu Sep 17, 2015 7:14 pm

RadAudit wrote:Isn't a market return based on the cap weighted returns of the companies in that market? So, US market returns are based on cap weights not revenue exposure. If that is true, I don't see the advantage of going to a revenue exposure based portfolio if I wanted to achieve market returns.
Right. I'm not sure one can even invest in a revenue-based index — though there may a few obscure ETFs that follow this strategy (and they'd likely be more expensive than the broad market, cap-weighted indexes).

Personally, I use the revenue exposure data just as a check on my cap-weighted international stock allocation. For instance, with a 60% U.S./40% International cap-weighted allocation, my overall revenue exposure works out to about:
  • • 35% United States
    • 32% Developed Markets
    • 33% Emerging Markets
This seems about right to me personally — and I don't want to increase my cap-weighted international allocation any further, since it would reduce my revenue exposure to the U.S. economy (and its avid consumers) too much.
Cordially, Todd

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by ladders11 » Thu Sep 17, 2015 9:07 pm

Would be interesting to see how this revenue exposure has changed over time, and if it has changed for reasons that challenge the implied connection. When private/state-owned companies listed publicly for the first time, like China Mobile and PetroChina, wouldn't this have added greatly to the revenue of "emerging markets" in the MSCI? And almost artificially bumped the AW EM% in terms of revenue exposure, without much real economic change?

Total share of world economic activity in China, India and Mexico is still much higher than their stock exchange's market cap shares. Also is the EM share of world population.

Part of the EM investment story must be shifting consumption away from black/grey markets, and government companies listing on exchanges.

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by saltycaper » Thu Sep 17, 2015 9:11 pm

Thank you for posting, Simplegift.

I find the North American Index revenue numbers interesting. Only 15% to developed ex-North America. I thought it would be higher.

Also, hasn't 50% been thrown around in the popular media for % of foreign revenue for the S&P 500? Maybe I'm remembering that incorrectly, but if so, that can't be if these numbers are correct, even considering ex-US versus ex-North America.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by nisiprius » Thu Sep 17, 2015 9:23 pm

We can construct many pie charts of national thingies that will differ from global market cap, but the question is: under what theory are they relevant to the allocation of our own portfolio?

There is a theory, it makes a metric boatload of assumptions, but there is a theory, under which the market portfolio (the actual total assets held by a market) has special properties and is mean-variance optimal, and these properties are shared by cap-weighted portfolios that mirror the market portfolio. It's in textbooks. I don't think I understand it, but it's in textbooks.

Those textbooks don't say boo about revenue exposure portfolios or GDP portfolios or economy portfolios or portfolios that measure what the cap weight would be if companies that don't issue stocks did issue stocks.

I've seen numerous articles that say something like "Do you realize that your total international index doesn't reflect relative proportions of X?" and I say "When is the article going to explain why I should care," and it never does. It just assumes that everyone in the know agrees that it should.

Why should I care how my portfolio compares with regional revenue exposure? Any more than GDP, literacy, or wine production? (Measuring by regional wine production, I'm seriously underweight in European stocks).

MSCI says:
In this global context, it is crucial to understand the geographic distribution of company revenues as it may enhance the investment decision processes for constructing and managing global portfolios. To that end, the MSCI Economic Exposure Indexes aim to reflect the performance of companies with high economic exposure to specific regions. Managers can use these in a number of different ways:

Tilting their portfolios towards domestic stocks with higher international exposure.
Creating a more “pure” domestic bias in their portfolio.
Dynamically allocating to (or away from) securities in countries or regions that display momentum.
Increasing or decreasing allocations via passive exposures.
Developing an alternative way to diversify globally through a portfolio of companies with diversified regional exposure.
But why should I want to do any of these things?

(By the way what does "creating a more 'pure' domestic bias in their portfolio" mean?)

P.S. I love this one: "Dynamically allocating to (or away from) securities in countries or regions that display momentum." Which is it, MSCI?
Last edited by nisiprius on Thu Sep 17, 2015 9:32 pm, edited 3 times in total.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift » Thu Sep 17, 2015 9:29 pm

saltycaper wrote:Also, hasn't 50% been thrown around in the popular media for % of foreign revenue for the S&P 500? Maybe I'm remembering that incorrectly, but if so, that can't be if these numbers are correct, even considering ex-US versus ex-North America.
You're close, the latest 2015 figures for the S&P 500 companies were about 48% foreign revenue.

The difference, I believe, may be that the indexes MSCI is reporting revenue data for are all-cap indexes, with more mid-cap and small-cap companies, which have a greater percentage of domestic revenue. Also, their North America Index includes companies in Canada, which further confuses a direct comparison with the S&P 500.
Cordially, Todd

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift » Thu Sep 17, 2015 9:45 pm

nisiprius wrote:We can construct many pie charts of national thingies that will differ from global market cap, but the question is: under what theory are they relevant to the allocation of our own portfolio?
Assuming you don't invest in the global market-cap stock index yourself, Nisi, and instead split your equity allocation between a U.S. stock allocation and an international stock allocation (as many Bogleheads do, anywhere from 80/20 to 50/50) — then you're making an allocation decision based on country-of-domicile — and you've already left the world of mean-variance optimization based on the global market-cap portfolio.

Revenue exposure is just another metric to "look behind the curtain" of one's domicile-based asset allocation decision, to help better inform your subjective allocation to U.S. and international stocks. Nothing more, nothing less. With increasing globalization, economic exposure may become more important than country-of-domicile in this asset allocation decision, in my view.
Last edited by SimpleGift on Thu Sep 17, 2015 10:17 pm, edited 2 times in total.
Cordially, Todd

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by randomguy » Thu Sep 17, 2015 10:10 pm

ladders11 wrote: When private/state-owned companies listed publicly for the first time, like China Mobile and PetroChina, wouldn't this have added greatly to the revenue of "emerging markets" in the MSCI? And almost artificially bumped the AW EM% in terms of revenue exposure, without much real economic change?
.
Is that an artifical boost or a correction to the right value?

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by Jhonny » Fri Sep 18, 2015 2:15 am

Simplegift wrote:
nisiprius wrote:We can construct many pie charts of national thingies that will differ from global market cap, but the question is: under what theory are they relevant to the allocation of our own portfolio?
Assuming you don't invest in the global market-cap stock index yourself, Nisi, and instead split your equity allocation between a U.S. stock allocation and an international stock allocation (as many Bogleheads do, anywhere from 80/20 to 50/50) — then you're making an allocation decision based on country-of-domicile — and you've already left the world of mean-variance optimization based on the global market-cap portfolio.
Is that necessarily the case? Obviously that would depend on the assumptions, but you have, e.g., increased volatility with higher exposure to regions where currencies other than USD dominate. Could it not be the case that a slight/moderate domestic tilt gives you optimal results under an MVO?

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by Jhonny » Fri Sep 18, 2015 2:27 am

nisiprius wrote:Why should I care how my portfolio compares with regional revenue exposure? Any more than GDP, literacy, or wine production?
I would assume we should care if revenue exposure is an important driver for returns, volatility and correlations. I can't name a specific theory, but I'm sure someone theoretically savvy could present one. If it proves better than the theory you're referring to, I'm sure the assumptions will be different.

To your point about GDP/literacy/wine production -- you probably agree that, intuitively, the first one is most likely to be a driver of the things we care about whereas the last one is least likely. Am I wrong? Using this intuition, we can guide our priorities as we try to understand these things.

I think I agree with Simplegift's point that it's another signal possibly worth weighing into the overall decision making framework, but it would be interesting to see something concrete on how much it matters so we can develop a better intuition around it.

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift » Fri Sep 18, 2015 3:22 am

Just to add: If one owns stock indexes at all (including an all-U.S. equity portfolio), one already has a global revenue exposure — but just may not be aware of it. This table is from a post last year, linked in the OP:
  • Revenue Exposure — Various Mixes of U.S. and Intl Cap-weighted Stock Indexes, 2012-13
    Image
    U.S. Revenue Data for Q2-2013 from The Economist
    Global Revenue Data for Q3-2012 from Blackrock
Again, this is just data, with no agenda or recommendation attached to it. This metric was helpful to me in determining my own allocation between U.S. and international stocks — and it could be of increasing importance in the future, I expect, as companies derive more and more of their revenue beyond their home countries.
Cordially, Todd

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by neomutiny06 » Fri Dec 16, 2016 8:41 am

Simplegift wrote:Just to add: If one owns stock indexes at all (including an all-U.S. equity portfolio), one already has a global revenue exposure — but just may not be aware of it. This table is from a post last year, linked in the OP:
  • Revenue Exposure — Various Mixes of U.S. and Intl Cap-weighted Stock Indexes, 2012-13
    Image
    U.S. Revenue Data for Q2-2013 from The Economist
    Global Revenue Data for Q3-2012 from Blackrock
Again, this is just data, with no agenda or recommendation attached to it. This metric was helpful to me in determining my own allocation between U.S. and international stocks — and it could be of increasing importance in the future, I expect, as companies derive more and more of their revenue beyond their home countries.
Revisiting an old post, I was very fascinated by this research. I think looking at revenue can be a nice indicator. Are you still settled on a 60% US/40% International split? You said this was as far as you would go. (And how much of that is EM?) thanks.

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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by spdoublebass » Mon Jan 22, 2018 9:22 am

SimpleGift wrote:
Thu Sep 17, 2015 5:15 pm
As companies worldwide generate more and more of their revenues beyond their home country-of-domicile, there's an increasing disparity between the capitalization weights of the indexes in which we invest and the economic exposure of these indexes. This post summarizes the latest data published by MSCI on the revenue exposure of various cap-weighted indexes, all from October 2014.
I enjoyed this thread very much. Is there any new data from what you already posted (which is from 2014)? I've been looking online but have had no luck.
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