Companies worldwide are generating more of their revenue from outside their home markets than ever before.
Morningstar Indexes strategist Dan Lefkovitz gives a quick rundown of his new paper, Global Equity Markets Grow Even More Global. This study examines geographic revenue sources for 7,942 companies from 48 countries across developed and emerging markets and includes large-, mid-, and small-cap equities.
- In equity investing, we tend to think about geographic exposure in a one-dimensional way: Where’s a company based? Looking at revenue sources adds a new dimension to our understanding. It can illuminate both risk and opportunity.
- Ever since we began conducting this study in 2019, we have seen markets become increasingly global in their revenue sources. The revenue globalization trend is most pronounced among developed countries and less pronounced among emerging markets.
- Japan, most of Western Europe, Canada, and Australia all source a larger share of revenues from outside their home markets. Many European equity markets earn more in revenue from the U.S. than they do at home. Europe is home to many multinational companies: Nestle (Switzerland), Louis Vuitton Moet Hennessy (France), Novo Nordisk (Denmark), Shell (UK), BP (UK). In the US, companies like Apple, Meta, Alphabet, and Microsoft are global players. Some of the biggest constituents of the Morningstar Japan Index are Toyota and Sony.
- Emerging markets tend to have fewer multinationals. The Chinese equity market is dominated by local players. Banks, telecoms, and utilities are common atop emerging market indexes, and they tend to be domestically focused. There are some exceptions: Tech companies in India, South Korea, and Taiwan; and Brazil’s natural resources exporters.
- Globalizing revenue sources have likely contributed to equity markets moving in lockstep. Developed markets, which are the most globalized, are more correlated with each other than emerging markets are with developed markets. To bring this concept to life, think about biopharma companies. Whether they’re based in the US, France, Switzerland, or Japan, they are exposed to many of the same forces. On the flip side, a bank in Indonesia and a bank in Canada don’t have much in common.
- If one neglects international stocks, they lack exposure to some of the leading businesses globally. I live in the U.S., but my kids play Nintendo on a Samsung TV; I fill up my Japanese car at a British gas station; I fuel myself with a Swiss coffeemaking machine, then go running in German shoes.
In investing, it makes sense to broaden the opportunity set to the fullest. There are unique companies, industries, and growth drivers that you can’t get access to through a purely domestic portfolio.