It’s fundamentally about being agnostic/passive and riding the market, whatever it may be, or being selective/active, which we’ve been dressaged to think is a toss up.
Sure, but I think there is a middle between that, neither being fully active (stock picking) but also not fully passive (all world), which is choosing which markets to be in. E.g., I refuse to buy Chinese stock, so why would I want VT where they are included. Similarly for EM, there’s a reason they haven’t done an Asian Tiger and continue to be ‘emerging’ well into the 21st century (as you can see with Trump, autocratic and/or corrupt governments in such countries don’t make for good markets). Sure India has done well since Covid, but a) will that last and b) for every India in EM there is another that is crap. Brazil is flat since January 21, 6% up versus pre-covid. Not annual, cumulative. VWO overall is <4% annualized in the last decade.
So, I want to have a rational discussion on what are different ways to define what is a good regional equity asset allocation strategy specially with respect to US & EM
Most of the world indexes are based on free float market caps and I am not sure if that is the best way to have appropriate exposure considering
- USA represents 4% of worlds population, 25% of world GDP and approx. 45% of world listed market cap. MSCI ACWI accounts for 62-63% of USA
- EM represents 80% of world`s population, 50% of world GDP , 25% of worlds listed market cap. MSCI ACWI accounts for about 10% of EM.
If I divide the world in 4 buckets from perspective of Swiss investor, I wanted to ask what are the variables to account for to define the breakdown of equity exposure
- USA
- CH
- EM
- Dev ex USA
I think that World ETFs are easiest way to start investing but might not represent a true global exposure.
Just to be clear. I am not planning to sell any of my old ETFs. I am just thinking of investing “new” money accordingly to get towards the target regional allocation slowly over time.
P.S -: I approximated some numbers
P.S -: WEBH, EXUS, CHSPI & XMME would be the 4 ETFs to execute the investment plan
I am not sure what to make of this chart. It is just plotting the history. It does not really show the potential of future. Should this not be the reason to rethink where to invest as EM might have not been appreciated (in past) but does not mean they don’t have the potential
I did find a Morgan stanley paper discussing some aspects. Link here
The value of a stock of a company is ultimately how much it is expected to earn in the future. What you wrote is correct, but it’s not relevant. I think assuming that US-listed companies earn around 65% of all money spent in the world, and Switzerland-listed 2.5% of the same, is a reasonable estimation.
Surely you know what is the biggest market for Meta, for example? (I mixed up earnings with number of users, sorry).
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Just to be sure
Where do we get this information that 65% of the money spent in world is spent on US listed companies ?
Is this based on global revenue of globally listed companies?
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I think it might still be US because of purchasing power and competition in EMs.
Not on the companies, but their products. Earnings and many other fundamentals of publicly traded companies is accessible information and there are people paid to analyze it.
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Wouldn’t GDP share be a more reasonable estimation for that? Not all companies are listed and the percentage varies per country. If I remember correctly, that has big effects on the public market cap share of for example Germany.
If we limit ourselves to the money earned by public companies, it would be the expected money earned.
If we want to look at money earned presently, we would need to use some value indices. I think MSCI ACWI Value Weighted has share of earnings as one input.
I think there were many discussions about it from people who are much more insightful in finances. My take: we invest in a publicly listed companies because we can invest in them 
. As the information about their fundamentals is rather well accessible, people can valuate them. GDP weighting of publicly traded markets in each country doesn’t make sense because these are just different things. Also how can people valuate private or state-owned companies if they don’t disclose their stats?
Take Saudi Aramco, for example - one of the biggest companies in the world, but it is totally private, AFAIK.
So, you can probably make an index that includes non-public companies, let’s say you found a way to valuate them, but this index is not investable.
P.S.: this is my understanding as an outsider to the field of economy.
Yeah, I just challenged your assumption of MCW relation to present earnings. I think it is incorrect, for the reasons I listed.
I made no statements toward correcting weights of public companies by GDP.
I understand the topic of listed versus non-listed
But what about the topic of free float vs actual market cap.
So for example if 1 Trillion dollar company has free float of 300 Billion dollar. Should it only count at 300 B or 1 trillion while calculating weights ?
I tried to simplify. In a simple but still very reasonable model, the price of a stock is equal to all company’s future earnings, discounted (including some risk margin) to present value.
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How many shares of publicly listed companies does Berkshire hold and why should we count them twice?
Not sure if that’s the right example. Berkshire might be only few of those companies who have this situation
Normally in EM markets the locked shares belong to the owners or government and not to other publicly listed companies. So there isn’t a double counting
However I see the point that real market cap might not be obvious to calculate
Fwiw the reason I pick VT is that I don’t trust myself to not fiddle with my allocations after 3-4y of one bucket outperforming. (Eg US over the past 10y).
I actually was splicing between VTI/VEA/… and it was hard to not have some active setup (if you keep market cap you have to adjust the %age regularly, if you use fixed allocation you might be frustrated by the underperforming assets)
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Comparing apples and oranges.
EM from before WWI?
EM’s including the Tigers?
As I said above, there is a reason the countries that are EMs today, are still EMs today. How long will they be ‘emerging’.
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For equity returns it doesn‘t matter what status the country has.
If a super shit company with 3 p/e goes to still shitty 6 p/e, you made 100% gains.
It‘s all appropriately priced in an efficient market.
US companies have tremendous growth expectations priced in, that may or may not materialize. And high priced would suggest less risk => less return even.
That‘s a very bold claim you are making here.
I don‘t think we have much to talk about if you disagree on the basics of the efficient markets hypothesis. And I would challenge you, if you have the expertise yourself to make an opposition to that.
Are the markets perfectly efficient? Surely not, not even Fama would say that, but they certainly are pretty efficient.
Also my p/e example was a very simplistic showcase to demonstrate that investor return can be made with “bad” stocks/countries etc. and good stocks/companies can be overprized.
And yes I do tilt substantially towards lower priced value companies (p/e is not the only metric here though), as there is enough academic evidence for me to support that tilt. And that these higher risk companies have compensated risk exposures.
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Oh, I love this tangent as I feel I cannot contribute much to (or gain much from, for that matter) the armchair analysis here of the ‘rapidly changing’ US policies and their impact on investing.
So … there was another guy who was awarded the Nobel prize in social sciences (economics) in the same year as Fama: Robert J. Shiller who challenges the EMH.
Just saying … even in academics people disagree on the merits over these various theories (or hypotheses). Which I find not surprising given economics and asset pricing isn’t a hard science but indeed a social science.
I’ll take the other side of that, but that’s what makes a market. 
Fama was on a recent – like this past week or so – Odd Lots podcast if you’d like to hear his current view straight from the horse’s mouth: https://youtu.be/BW0cw5ajT2c?si=rMVCd5AkXeAdTBAJ (also on Spotify etc).
Spoiler: Fama still believes in it but admits it’s just a hypothesis.
I’m more with Buffett and Munger who are/were skeptical of the EMH. They acknowledge(d) that markets are often efficient, but that one can find mispriced opportunities through fundamental analysis.
Anyhow, we’re probably beating a dead horse with this topic, but I thought I’d chime in anyhow.
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