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

“Mark Mathew of Merrill Lynch has said that India will be amongst the least preferred markets in Asia if oil stays high. The food price and inflation concerns not as serious as crude”, according to MoneyControl, and Indian financial portal.

He did not specifically address China in that article.  Did he mean that India would fare worse than China or worse than most Asian countries?  We don’t know.  We hope to hear more from him on that question.

We would have thought that India would be somewhat less sensitive to spiralling energy costs than China, because India is less manufacturing intensive in its export business than China.

Here is a table of total energy consumption for oil, natural gas, coal and electricity in India and China. [note that electricity consumption is duplicative of oil, gas and coal consumption, except for nuclear, hydro and other sources]

If, in fact, either China (proxy FXI) or India (Proxy INP) will suffer significantly more than the other due to energy costs, there may be an opportunity to short the most energy cost sensitive one against the least energy cost sensitive one. That question may possibly deserve further evaluation.

Of course, if you do such a trade effectively and oil backs down, the trade would then go against you.  Given oil price volatility, you would need wide tolerances for profit swings in the position.

Richard Shaw
QVM Group LLC