Countries that require less energy per unit of GDP may fare better during a period of high energy prices.

This table shows the Kg of oil equivalent consumed per unit of GDP on a purchasing power parity basis for 32 countries, as reported by the United Nations.

This data is not a measure of energy use efficiency, because it does not distinguish between countries with high energy intensity industries (such as steel making) versus those with low energy intensity industries (such as software).

The data also does not indicate how much margin exists to be more efficient if necessary.

Interesting observations, include that the United States and China have similar energy consumption per unit of GDP, although the US figures probably include a much higher personal energy use component as part of the overall energy use.

Also, India uses only about 82% as much energy per unit of GDP PPP as China.

Russia uses the most energy to produce its GDP.

Brazil consumes less energy for its GDP PPP than Japan.  Given that Brazil is essentially energy independent of the rest of the world and is an energy exporter, and given that Japan is an energy importer, Brazil might be expected to fare better than Japan when dealing with rising energy costs.

Richard Shaw
QVM Group LLC

[securities mentions in this article: EWH, IRL, EWL, EWI, EWU, EWO, EIS, EWP, EWZ, EWJ, EWG, TUR, EWQ, ECH, EWW, EWN, INP, EWK, THD, EWA, EWD, VTI, FXI, EWY, EWS, EWM, IF, EWC, EZA, RSX]

The world market capitalization is ever changing as share and market values fluctuate, and the US share is shrinking.

The US market share has been declining steadily in recent years, while other markets have been increasing. Today, the US market (proxy SPY) has declined to less than 41% from nearly 53% as recently as of 2004, according to the S&P “World by the Numbers” report.  In earlier times, the US share was much higher than 53%.

Emerging markets (proxies VWO and EEM) have been gaining market share notably through the BRIC countries of Brazil (proxy EWZ), Russia (proxy RSX), India (proxy INP), and China (proxy FXI).

Germany (proxy EWG) and Japan (proxy EWJ) have held their own and actually increased their market share since 2004.

This table presents the annual market shares for the US, Japan, Germany, China, India, Brazil and Russia as of January of 2004, 2005, 2006, 2007, 2008 and May 2008.

Note that market share in this case is “free-float” market share, meaning freely investable shares. Free-float excludes shares not available for trading, such as government owned shares.

As of May 2008, world free-float market-cap was about $30.7 trillion versus a total market-cap of about $50.7 trillion. In other words, only about 61% of world total market-cap is considered free-float.

The US share has declined in part because the US market has not appreciated as fast as many other markets, but also because emerging markets have been releasing more shares into the free-float category.

The US share will likely continue to decline as more non-US markets open up their free-float, and perhaps as other markets gain in value at a faster pace.

Consider that 90% of US total market-cap is free-float, whereas only 19% of China’s total market-cap is free-float. China’s free-float market share would quadruple if 90% of its total market-cap were free to float.

Similar but less extreme circumstances exist between other developed market countries and other emerging market countries. For example, Japan and Germany have 75% and 76% of their total market-cap as free-float respectively, while Brazil, Russia and India have 51%, 39% and 31% of their total market-cap in free-float.

The approximate 41% US world market-cap share is in stark contrast to the typical 75% to 85% or higher US weight within the stock allocation of most US investor portfolios.

Those allocations may be suitable and appropriate, but here are some interesting questions to consider:

• Are most US investors aware that they have massively overweighted US stocks versus the US world weight?
• Do most US investors actively feel that US stocks are a better investment return opportunity which they have intentionally overweighted?
• Are most US investors underweight non-US stocks because they are concerned about foreign currency risk exposure of investing in non-US stocks?
• Do most investment advisors inform their clients of world market shares as it may relate to allocation choices, and then make an active and reasoned choice to overweight their US positions?
• Will most US investors continue to hold 75% to 85% or more in US stocks when/if the US world market-cap share falls to 30%?
• As a global citizen in a global investment world, what is the rational country allocation for you?

Richard Shaw
QVM Group LLC

Today’s announcement that the India’s largest industrial company, Tata, purchased the prestigious, formerly European Land Rover and Jaguar lines from the United States industrial company Ford, once one of America’s largest industrial companies, is yet another high profile indication of the historic shift of economic power from Europe and the US toward the India / China region.

The chart below shows the 3-year relative performance of the S&P 500 (SPY), India (IFN), Ford (F) and Tata (TTM).  India topped the US, and Tata topped Ford.

There is a demographic inevitability to the rise of India and China which together constitute roughly 1/3 of the world’s population.  They started, and are still, at low levels of GDP per person; and they have far to go before reaching the level of affluence of Europe and the United States.  That means “growth” and growth is fundamental to stock market value increases.

This week there has been a lot of negative news about how the S&P 500 today is approximately where it was 9 years ago. However, there has been good opportunity in other markets at the same time, as the MSCI country indices of India, China, Brazil and Russia illustrate.

It may be time for more US investors to widen their horizons and break away from the constrictions of rules of thumb that dictate massive overweighting of US stocks versus the rest of the world.

It has been a number of years since the US stock markets were more than 1/2 of world market free float capitalization.  Recently, the US stock market was in the neighborhood of 45% world market cap. 

Why should investors think that they should own 80% to 85% US stocks and 15% to 20% foreign stocks?  Following that aging rule of thumb didn’t do much good for the past 9 years — although we must point out that a 15 year analysis for US stocks looks much better.

We think investors should begin their stock allocation thought process with global market cap allocation, and then make deviations (overweighting and underweighting) for regions or countries from that base, and not from a base that begins with 80% or more of US stocks.  We live in a global economy and we should invest with a global perspective.

US stocks may deserve a strong overweighting in some periods and an underweighting in other periods.  If investing is an economic decision and not a patriotic expression, then its time to challenge old rules to see things more the way they are and are likely to be, and not so much how they were or we wish they would be.

The plain fact is that the rest of world excluding the US (proxy VEU) has been a better stock investment than the US (proxy VTI) for long-term holding for most of the the last quarter century. 

Richard Shaw
QVM Group LLC