The Composition of the Global Real Economy and Public Equity Markets

Abstract

We evaluate to what extent the geographical and industry composition of the global real economy corresponds to that of public equity markets. We find that there are substantial differences between both regional and industrial composition of the real economy and equity markets. For example, the US is relatively overrepresented when the value of public equities is compared relative to its share of global GDP. Due to foreign exposures of US-listed companies, the economic exposure to the US of a global equity portfolio is much closer to its GDP than its market capitalization suggests. Similarly, the low share of emerging markets public equities in a global portfolio is somewhat misleading, as the economic exposures of public global equity markets to emerging markets are close to its weight in global GDP. From an industrial perspective, equity markets seem to be substantially overexposed to consumer goods and underexposed to consumer services compared to real economic activity. However, these industrial differences might also be caused by classification differences between economic and financial agencies. Nevertheless, the differences in composition may contribute to the explanation of the empirical disconnect between economic growth and equity returns. It may also help investors to target regions or industries in private equity that are underrepresented in their public equity portfolio.