The Future of Globalization Isabelle Mateos y Lago, Chief Multi-Asset Strategist BlackRock Investment Institute Saturday, 18 th November 2017
Globalization has created a broader opportunity set for asset owners Europe has embraced global investing much more than the U.S. and Japan Domestic vs. foreign assets for mutual funds and ETFs domiciled in Japan, U.S. and Europe, November 2017 10 Investors are also becoming more sophisticated Geographic breakdown of ETP AUM, 2009-2017 10 75% Foreign 8 6 PERCENT 5 PERCENT 4 Domestic 25% 2 Japan U.S. Europe 2009 2010 2011 2012 2013 2014 2015 2016 2017 Single Country ETP Multi-country ETP Sources: BlackRock Investment Institute, with data from EPFR, November 2017. Notes: For funds domiciled in Japan, U.S. and Europe, the bars represent the split of assets invested in domestic markets, vs. foreign. Global funds (that may include domestic exposure) are included as foreign investments. U.S. domestic is represented by North America. Sources: BlackRock Investment Institute, with data from BlackRock ishares, Morningstar November 2017. Notes: The chart shows the breakdown of global ETPs based on whether the indexes that they track are single country or multi-country focused. 2
EM is changing shape dramatically MSCI ACWI remains dominated by DM Country decomposition of MSCI ACWI Index, 1997 to present 10 8 but EM debt and equity markets have seen much bigger changes REGION WEIGHT Country decomposition of MSCI EM Index, 1997 to present 10 8 6 4 2 REGION WEIGHT 6 4 1997 2000 2003 2006 2009 2012 2015 Brazil China India Korea Mexico Russia South Africa Taiwan Other Regional decomposition of JP Morgan Emerging Market Bond Index, 1994-2017 2 1997 2000 2003 2006 2009 2012 2015 United States Japan United Kingdom France China Germany Canada Switzerland Australia Korea Others Sources: BlackRock Investment Institute with data form MSCI, November 2017. REGION WEIGHT 10 75% 5 25% 1994 1998 2002 2006 2010 2014 Africa Asia Europe Latin Mideast Country count (RHS) Source for both charts: BlackRock Investment Institute with data from MSCI and J.P. Morgan, November 2017. 80 60 40 20 0 NUMBER OF COUNTRIES 3
China is the only large market that remains off limits China A-share market is large Market value of major stock indices, November 2017 but China equities and bonds appear underrepresented relative to China s macro influences China as % of the world 25,000 25% Macro Equity Bond 20,000 2 BILLION USD 15,000 10,000 15% 1 5,000 5% 0 S&P 500 China A- Share TOPIX EURO STOXX 50 FTSE 100 DAX 30 Source: BlackRock Investment Institute with data from Thomson Reuters Datastream, November 2017. GDP Total trade A-shares turnover as % of the world A-shares market cap as % of the world Foreign ownership in A- shares China bonds as % of world Foreign ownership in China bonds Source: BlackRock Investment Institute with data from IMF, WFE, MSCI, FactSet and Goldman Sachs, November 2017. Notes: GDP and total trade are as of 2016, A-shares turnover as% of the world and A- shares market cap as % of the world are as of April 2017, foreign ownership in A-shares is as of March 2017, China bonds as % of world is as of Sep 2016, foreign ownership in China bonds is as of 17Q1. 4
Economic interlinkages are important The DM growth transmission to China and EM matters more in periods of reflation Impact of hypothetical 1% growth rise over two years Beta to global growth varies by region Beta of regional GDP growth to global GDP growth, 1980-2017 2000-2007 Cyclical: U.S. reflation Structural: Globalisation ramps up 2010-2016 Cyclical: U.S. reflation Structural: China & EM getting larger 1.6 1.4 1.9 EM ex-china 0.9 EM ex-china BETA 1.2 1.0 DM 0.5 DM 1.0 1.0 0.1 China 0.4 0.2 China Sources: BlackRock Investment Institute, February 2017. Notes: This chart gives estimates of the influence of a sudden growth boost in one economic region on others, in this case developed markets, China and emerging markets excluding China. The numbers represent the cumulative percentage-point impact on growth over the following two years of a hypothetical 1% growth rise in the originating region. For example, a 1% DM growth rise would have resulted in a simultaneous 1.9% growth boost to EM ex-china in the 2000-2007 period. The estimates are derived from BlackRock analysis modelling growth in DM, China and EM ex China where growth in one region is assumed to be a function of its own historic growth and that in the other regions. 0.8 0.6 Developed Market US European Union 1980-1999 2000-2017 Japan UK Emerging Market Sources: BlackRock Investment Institute, with data from IMF WEO database, November 2017. Notes: GDP growth is measured on an annual basis. Beta represents the volatility of a region s GDP growth in comparison to global GDP growth. 5
Stock markets non-domestic exposure has been growing A rise in foreign revenue Share of foreign revenue, 1995-2016 Non-U.S. regions are even more global Revenue share by region, November 2017 30 10 SHARE OF FOREIGN REVENUE (%) 20 10 REVENUE SHARE 75% 5 25% 0 1995 1998 2001 2004 2007 2010 2013 2016 US Small-cap US Large-cap U.S. EM Japan Europe ex- UK Foreign Domestic Share UK Sources: BlackRock Investment Institute with data from FTSE, Russell and Thomson Reuters, January 2017. Notes: the bars indicate the share of overseas revenue for members of the Russell 2000 index of U.S. small-cap companies. The line shows the share for members of the Russell 1000 index of U.S. large caps. Source: BlackRock Investment Institute with data from FactSet, November 2017. Notes: The regions listed above are represented by MSCI USA, MSCI EM, MSCI Japan, MSCI Europe ex-uk and MSCI UK indexes. 6
As a result, we should expect higher correlations in returns Stock market correlations with EM have risen dramatically Regional correlation with EM equities, 1988-2017 8 7 Sector-wise, stock market correlations between DM and EM are also increasing Sectoral correlation between DM and EM equities, 2001-2017 Utilities Telecom CORRELATION WITH EM EQUITIES 6 5 4 3 2 Real Estate Materials IT Industrials Healthcare Financials Energy 1 Cons. Staples US Japan UK Europe ex UK 1988-1997 1998-2007 2008-Present Cons. Disc. 2 4 6 8 10 2001-2007 Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. Notes: the chart shows the correlations based on daily data between the time periods shown above. Returns data based on MSCI USA, MSCI Japan, MSCI UK, MSCI Europe ex-uk and MSCI EM indexes. Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. Notes: the chart shows the correlations based on daily data between the time periods shown above. Returns data based on MSCI indexes. DM is represented by MSCI WORLD sector indexes, EM is represented by MSCI EM sector indexes. 7
But diversification still comes to those who are willing to wait Diversification can be found over longer time periods Correlation of EM and DM equity returns, 1988-2017 8 6 CORRELATION 4 2 1M 12M 24M 36M HOLDING PERIOD Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. EM equity returns are based on MSCI Emerging Markets Index. DM equity returns are based on MSCI World Index. The period covered by the calculation is from May 1988 to May 2017, and the return data is based on 1-month rolling basis. 8
Bond markets are increasingly connected Neutral rates are increasingly determined by global factors Bond yields correlations are also rising Factors affecting G7 neutral rates, 1975-2017 Co-movement of major bond yields, 1974-2016 10 U.S. G7 ex U.S. 100 Foreign 75 75% 5 CORRELATION (%) 50 25% 25 Domestic 1975-1995 1996-2017 1975-1995 1996-2017 0 1974 1980 1986 1992 1998 2004 2010 2016 Sources: BlackRock Investment Institute, with data from G7 statistical agencies and central banks, Thomson Reuters, November 2017. Note: This chart shows the variance decomposition of the US and G7ex-US neutral rate over two time periods. The bars display the proportion of the variance that is attributable to domestic or foreign shocks. This estimate follows the methodology in Holston, Laubach & Williams (2016). Source: BlackRock Investment Institute, November 2017. Notes: this chart shows a seven-year rolling regression (r-squared, or co-efficient of determination) of monthly changes in U.S. 10-year yields on a factor that captures the monthly change in German, Japanese and UK 10-year yields. The regression shows what proportion of U.S. yield changes may be explained by a common global factor extracted from all the yield moves. 9
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