Is The US Too Important To Global Markets?
It takes a special kind of personality to find the doom and gloom amidst new all-time highs for global equity markets.
But there has been a consistent argument made from some quarters that this rally is built on thin ice, given the large weighting that the US market enjoys within the global indices.
So, the argument goes, as the US becomes a larger and larger slice of the overall global equity pie - when the US’ fortunes reverse, then it will take the rest of the market with it into some kind of death spiral. Or something.
And it is a neat argument that makes intuitive sense.
But, just to be sure, let’s have a look at what has happened in the past when indices have suffered a loss of form for a leading nation.
Back in 1989, the Japanese stock market (the “Nikkei”) represented 40% of the global market (as defined by the MSCI All Country World Index). This was a time when the world couldn’t get enough Toyotas and televisions from the tiny economic powerhouse.
But investor enthusiasm got massively ahead of itself, the Nikkei (with the benefit of hindsight) became massively over-valued and the market collapsed into a thirty five year drawdown that it has only recently recovered from.
What About Japan?
A few weeks back, in making the case for investing in shares for the long term, I wrote:
As the Japanese market collapsed, so too did its weighting in the global equity indices. By June 2025, the Japanese market had reached its all time low in terms of global equity market weighting - just 4.8%.
But from 1989 to 2025, global equities did just fine. Better than fine in fact.
Although Japan fell away, other nations’ markets (mainly the US) picked up the slack and the overall market roared higher.
Japan’s thirty five year decline in relevance is the most extreme example at a global level of a leading country in an index falling away.
However, there are other similar examples at a more regional level where this happened, and yet the index did grand because the other components held their end up.
China: 2020 - 2024 (MSCI Emerging Markets Index)
UK: 2010 - 2025 (MSCI Europe Index)
Korea: 2000 - 2025 (MSCI Emerging Markets)
There are others, but it is tea time in Malta and I can’t really be bothered to dig them out. You catch my drift.
The point is this. Just because a major contributor to an index collapses, doesn’t mean that the rest of the market will automatically collapse with it.
The reasons why are found in the basic rules of investing engagement. First of all, this is why we diversify and don’t invest into individual countries and markets. Second, having a long enough time horizon rids all ills - allowing sufficient time for the “new winners” to emerge.
If the US is ever overtaken as the dominant force in capital markets - there will be another to step in and take the baton. Maybe China. Maybe India. Maybe some cool new country that hasn’t even been set up yet.
Now there’s a thought…
Have a lovely weekend.
Past performance is not indicative of future returns. None of the above is intended to constitute advice to any specific individual. If you have any queries regarding your situation, please consult with a regulated financial adviser.
I utilised this framing in a prospect meeting this morning 🫡