How global financial markets have grown and shifted over time | Beyond The Charts#18

Summary

Goldman Sachs's 'Investing in Everything, Everywhere All at Once' report explores how global investable assets have surged to $261 trillion, more than twice the size of global GDP. The report highlights the dominance of U.S. equities, driven by strong returns, tech growth, and the global reserve status of the U.S. dollar. It also examines the changing composition of global markets, with sectors like technology outpacing traditional commodities. Additionally, it discusses how simple investment strategies, like the 60/40 portfolio, often outperform a global market-weighted portfolio, challenging conventional investment wisdom.

Takeaways

• 😀 The world portfolio, as defined by Goldman Sachs, includes all investable assets like global equities, bonds, gold, and alternatives, and is valued at approximately $261 trillion.
• 😀 Over the past 75 years, the global mix of stocks, bonds, and gold has returned an average of 7.8% per year before inflation, compounding significantly over time.
• 😀 The growth of global markets has been driven by deeper and more liquid markets, with multinational companies expanding and technology enabling greater connectivity.
• 😀 Different periods have favored different asset types, such as gold during the 1970s, equities during the 1990s, and stocks and bonds after the 2008 financial crisis.
• 😀 The US equity market dominates the world portfolio, representing 60-65% of the global equity value, up from about 50% since the 1950s.
• 😀 The strong performance of US markets post-2008, especially tech companies, has contributed to the increasing weight of US equities in global benchmarks.
• 😀 US dominance in global equity markets is supported by the depth and liquidity of US capital markets and the US dollar's status as the reserve currency.
• 😀 Sector composition in the global market has shifted, with technology and financial sectors now making up a significant share, while commodities-related sectors have shrunk.
• 😀 Global investor behavior, such as increased US equity allocations, has contributed to the dominance of US stocks in the world portfolio.
• 😀 The world portfolio has often underperformed simpler strategies like a 60/40 mix of global equities and bonds, especially in periods like the post-2008 era when US equities outperformed.
• 😀 The evolution of the world portfolio highlights the growing weight of US and technology-related assets, reflecting broader market and economic shifts.

Q & A

What is the 'world portfolio' according to Goldman Sachs?

The 'world portfolio' refers to the total global stock of investable assets, which includes global equities, bonds, gold, and alternative assets. It is a measure of all the assets in the world that can be invested in, reflecting both the size and concentration of financial markets.

How much is the estimated value of the world portfolio, and how does it compare to global GDP?

The world portfolio is estimated to be worth about $261 trillion, which is more than twice the size of global GDP. In the early 1990s, the value of the world portfolio was about 75% of global GDP.

Why has the world portfolio grown over time?

The growth of the world portfolio can be attributed to long-term asset returns and the expansion of global capital markets. Additionally, the deeper liquidity of financial markets, the increase in multinational companies, and falling interest rates have all contributed to this growth.

How has the performance of the US equity market affected the world portfolio?

The US equity market has significantly influenced the world portfolio, particularly since the 2008 financial crisis. US equities have outperformed most other regions, driven by strong returns, stable profitability of US companies, and the expansion of large tech firms. This has increased the weight of US equities in global benchmarks.

What factors contributed to the dominance of US equities in the world portfolio?

Several factors contributed to the dominance of US equities, including the strong performance of US companies since the 2008 financial crisis, the outperformance of technology sectors, and the liquidity and depth of the US capital markets. Additionally, the US dollar’s status as a reserve currency has also played a role in attracting global investments.

How did the sector composition of global markets change over time?

The sector composition of global markets has shifted from energy, materials, and industrial companies (such as oil, mining, and manufacturing) toward technology and financial sectors, which now represent a substantial part of global equity value. This shift reflects the global economy's transition toward services and knowledge-based industries.

What impact did the 2008 financial crisis have on the global financial sector?

The 2008 financial crisis caused a significant and lasting reduction in the valuation of the financial sector. Before the crisis, banks and financial institutions made up a larger portion of global market indices. Post-crisis, the technology sector expanded, surpassing financial institutions in market value.

How do global investors' allocation preferences differ by region?

Regional differences in investor allocation preferences are influenced by the structure of financial systems. For example, Europe's financial system is more bank-centered and less integrated than the US system, leading to lower equity allocations. In smaller capital markets or those where households rely more on bank deposits, equity participation has traditionally been lower.

What role do global benchmarks play in investor behavior?

Global benchmarks, which are increasingly weighted toward US assets, influence investor behavior by guiding allocations. Investors who track these benchmarks tend to increase their exposure to US equities and bonds. Overseas ownership of US equities is currently at its highest recorded level.

Is investing in the world portfolio the best strategy according to Goldman Sachs?

According to Goldman Sachs, simply investing in the world portfolio is not always the best strategy. The analysis found that a basic 60/40 mix of global equities and bonds has historically delivered stronger long-term risk-adjusted returns than the world portfolio. The world portfolio often underperforms simpler strategies like 60/40 over long periods.