Global Stocks — Market Cap vs. Revenue Exposure

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Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift »

[2015 thread bumped in 2023 --admin LadyGeek]

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.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by RadAudit »

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

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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.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by ladders11 »

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 »

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 »

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 »

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.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift »

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.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by randomguy »

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 »

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 »

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 »

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.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by neomutiny06 »

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

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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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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by InvestInPasta »

Where can we find updated data of MSCI ACWI/World revenue exposure?
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by lazyday »

SimpleGift wrote: Thu Sep 17, 2015 5:15 pm
What if the percentages above were replaced with revenue per dollar invested?

If the data isn't available, we could estimate. For example, if the PS (price/sales) of All-World Index is 1.4, and we invested $1 in All-World Index, then instead of showing 31% of revenue from North America, we would show $.22 of revenue from North America.

And for the North America Index, instead of showing 69% of revenue from NA, if the p/s of the US market is 2.1, then we would show $.33 revenue from NA.

The results might be useful to show to someone who insists that we only need to invest in the US.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by alex_686 »

So a quick little counter argument against revenue exposure, and that revenue exposure means less than you think.

IIRC, each iPhone creates 8 times is value in international trade. Chips are made in one EM, shipped to another EM to be tested and packaged, shipped to another EM for sub-assembly, shipped to another EM for assembly, etc. These sprawling supply chains can easily cause revenues to be double or tripled counted.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift »

spdoublebass wrote: Mon Jan 22, 2018 8:22 am 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.
InvestInPasta wrote: Tue Oct 08, 2019 3:38 am Where can we find updated data of MSCI ACWI/World revenue exposure?
Apologies for not responding to your queries sooner. An updated Forum post from May 6, 2019 can be found here:

International Exposure — A Fresh Look at Your Stock Portfolio


This post is based upon recent research from Morningstar, introduced in this article. Also, at the bottom of the article is a link to a white paper Morningstar has written about global revenue exposure and their methodology. To receive this white paper, one needs to give up their email address to Morningstar — which may or may not discourage those interested in this subject.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by Investor2001 »

SimpleGift wrote: Tue Oct 08, 2019 4:12 pm
spdoublebass wrote: Mon Jan 22, 2018 8:22 am 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.
InvestInPasta wrote: Tue Oct 08, 2019 3:38 am Where can we find updated data of MSCI ACWI/World revenue exposure?
Apologies for not responding to your queries sooner. An updated Forum post from May 6, 2019 can be found here:

International Exposure — A Fresh Look at Your Stock Portfolio


This post is based upon recent research from Morningstar, introduced in this article. Also, at the bottom of the article is a link to a white paper Morningstar has written about global revenue exposure and their methodology. To receive this white paper, one needs to give up their email address to Morningstar — which may or may not discourage those interested in this subject.


Great. Any update in the last years or info like 2014?

I find the info of 2019 less informative.


I wonder why msci does not provide something like your diagram of 2014 in regular intervalls
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by SimpleGift »

Investor2001 wrote: Wed May 24, 2023 11:11 am Great. Any update in the last years or info like 2014?

I find the info of 2019 less informative.

I wonder why msci does not provide something like your diagram of 2014 in regular intervals
MSCI did publish an update of their revenue exposure data for regions around the world in December 2020 (chart below) — but this is the last update I’ve seen from them.

Image
Source: MSCI as of December 2020.

This chart is a bit confusing to read at first glance, but here is MSCI’s detailed explanation:
MSCI wrote:The second column, " of Global Revenues by MSCI Regional Index," gives the overall revenues of all the companies in a regional index as a percentage of the overall revenues of all the companies in the MSCI ACWI Index. For example, the MSCI Emerging Markets Index generated 34.1% of all the revenues of the MSCI ACWI Index. The third column, *% of Regional Revenues for MSCI ACWI Index," is based on the MSCI Economic Exposure dataset applied to the MSCI ACWI Index. It gives the regional origins of all the revenues in the MSCI ACWI Index. For example, in aggregate, all the companies in the MSCI ACWI Index generated 42% of their revenues in emerging economies. The flows between columns two and three illustrate from which regional economies the revenues of the regional indexes come. For example, for the MSCI Emerging Markets Index, 2.3% of revenues (turquoise flow) come from North America, 1.8% (orange) from Europe, 1.1% (yellow) from the Pacific economies (Japan, Hong Kong, Singapore, Australia and New Zealand) and 28.8% from emerging economies (red).
The main story here hasn't changed much over the last decade: North America (U.S. and Canada) still commands a huge percentage of the market cap in the global index, while the sources of revenue in the global index are fairly evenly split, with about one third from North America, one-third from Europe and Pacific developed countries, and one-third from Emerging Markets.
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by Trance »

SimpleGift wrote: Wed May 24, 2023 2:03 pm
Investor2001 wrote: Wed May 24, 2023 11:11 am Great. Any update in the last years or info like 2014?

I find the info of 2019 less informative.

I wonder why msci does not provide something like your diagram of 2014 in regular intervals
MSCI did publish an update of their revenue exposure data for regions around the world in December 2020 (chart below) — but this is the last update I’ve seen from them.

Image
Source: MSCI as of December 2020.

This chart is a bit confusing to read at first glance, but here is MSCI’s detailed explanation:
MSCI wrote:The second column, " of Global Revenues by MSCI Regional Index," gives the overall revenues of all the companies in a regional index as a percentage of the overall revenues of all the companies in the MSCI ACWI Index. For example, the MSCI Emerging Markets Index generated 34.1% of all the revenues of the MSCI ACWI Index. The third column, *% of Regional Revenues for MSCI ACWI Index," is based on the MSCI Economic Exposure dataset applied to the MSCI ACWI Index. It gives the regional origins of all the revenues in the MSCI ACWI Index. For example, in aggregate, all the companies in the MSCI ACWI Index generated 42% of their revenues in emerging economies. The flows between columns two and three illustrate from which regional economies the revenues of the regional indexes come. For example, for the MSCI Emerging Markets Index, 2.3% of revenues (turquoise flow) come from North America, 1.8% (orange) from Europe, 1.1% (yellow) from the Pacific economies (Japan, Hong Kong, Singapore, Australia and New Zealand) and 28.8% from emerging economies (red).
The main story here hasn't changed much over the last decade: North America (U.S. and Canada) still commands a huge percentage of the market cap in the global index, while the sources of revenue in the global index are fairly evenly split, with about one third from North America, one-third from Europe and Pacific developed countries, and one-third from Emerging Markets.
This might be why the average PE ratio for American stocks (19) is much higher than the average international pe ratio (12). American stocks are 50% more expensive on a fundamental level when comparing price to earnings. Funny enough this mimics the market share where American stocks are 60% and international has market cap of 40%. American stocks hold 50% more market share than international (40 * 1.50 = 60).

I think in one of Ben Felix's videos he showed how almost all of the out performance of American stocks this last decade and a half have been from simply being over valued and how its going to be increasing difficult to continue this out performance. Big reason I keep global market weights with VT
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Re: Global Stocks — Market Cap vs. Revenue Exposure

Post by muffins14 »

Trance wrote: Wed May 24, 2023 4:59 pm
I think in one of Ben Felix's videos he showed how almost all of the out performance of American stocks this last decade and a half have been from simply being over valued and how its going to be increasing difficult to continue this out performance. Big reason I keep global market weights with VT
+1.

I can see this as an argument for global cap weight.
Or, weight by fundamentals like FNDA, FNDF, FNFC. I hold a lot of FNDA and used to hold a lot of the other two

I dont think I would weight by revenue exposure though
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