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IS THE EQUITY MARKET REPRESENTATIVE OF THE REAL ECONOMY?

IS THE EQUITY MARKET REPRESENTATIVE OF THE REAL ECONOMY? We evaluate to what extent the geographical and industry composition of the global real economy corresponds to that of public equity markets. We aggregate firm-level data on geographical revenue distribution to determine its geographical exposure, and national accounts data to determine the industrial composition of the real economy. 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 com- panies, 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 equities in a global portfolio is somewhat misleading, as the economic exposures of 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 under- represented in their public equity portfolio. JEL codes: E01; F23; F60; G15; L16; O47 Keywords: economic growth; equity market; GDP; investments http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economics, Management, and Financial Markets Addleton Academic Publishers

IS THE EQUITY MARKET REPRESENTATIVE OF THE REAL ECONOMY?

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Publisher
Addleton Academic Publishers
Copyright
© 2009 Addleton Academic Publishers
ISSN
1842-3191
eISSN
1938-212X
Publisher site
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Abstract

We evaluate to what extent the geographical and industry composition of the global real economy corresponds to that of public equity markets. We aggregate firm-level data on geographical revenue distribution to determine its geographical exposure, and national accounts data to determine the industrial composition of the real economy. 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 com- panies, 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 equities in a global portfolio is somewhat misleading, as the economic exposures of 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 under- represented in their public equity portfolio. JEL codes: E01; F23; F60; G15; L16; O47 Keywords: economic growth; equity market; GDP; investments

Journal

Economics, Management, and Financial Markets – Addleton Academic Publishers

Published: Jan 1, 2017

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