Part of investing success is recognizing demographic trends, and riding the wave of economic freedom and growing middle class wealth to profits. The above graphs show the world's population by latitude and longitude. I find the longitude graph much more interesting than the latitude graph. It shows the potential impact of the large Asian and African populations on the world economy. While Africa suffers from a lack of economic freedom and is probably not fertile investing ground at this time, Asia is an entirely different story. Asia's populations dwarf that of the Western hemisphere and one can only imagine the economic potential of this area as the middle class grows and populations become wealthier and better educated.
This is a fascinating post/demographic comparison. What do you think of the Asia stock market's growth. I have also pondered demographics/GDP growth etc. But some odd historical elements puzzle me more than anything. Growing economies have higher historical GDP growth than the U.S. since 1985, but their stock markets have trailed the U.S. since 1985. And the U.S. market (which had enormous GDP growth compared to Britain over the past 150 years) wasn't really any better than Britain as an investment. If you bought an index in the UK, reinvested all dividends, it would be about the same as if you could have done the same thing in the U.S. Very interesting. The more I learn, the more questions I have.
You raise a great point, and it is a tough question to answer. As an aside, I've read articles whose premise is that Warren Buffett is a great investor because he bets on the side of demographic trends-- the rise in consumer finance (American Express, Wells Fargo), the popularity of carbonated sugar water around the world and the rising middle class (Coke), and the rise in America home ownership (Freddie Mac (though he was lucky or wise enough to bail on that investment when he saw undue risk on their balance sheet), etc.
Now back to demographics/GDP Growth and Stock market returns.... some bullet points I'd like to make are:
1. GDP is analogous to sales; stock returns to corporate profits.
2. A company’s profits may be earned outside the
country in which it is listed.
3. Dilution hurts shareholder returns.
4. Poor corporate governance affects share price
The faster growing economies tend to be the so-called emerging markets and the companies in those markets tend to have poor corporate governance and are run as personal fiefdoms with a different agenda that maximizing shareholder value. While the slower growing economies in the developed markets tend to have strong corporate governance, are run to maximize shareholder value, and tend to derive a large part of their sales and profits outside their countries of domicile and therefore there profits tend to grow faster than the GDP of the countries they call home.
That is my simplistic back of the cocktail napkin kin of answer. You can let me know if you think that makes any sense or if I am just blowing smoke.
In my own equity investments, I'm 50% US and 50% overseas, with money in every major market and emerging market. And 50% large cap, 50% small cap in all markets.ReplyDelete