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The world is a better place
Commentary: What the global investment map looks like without the U.S.
By John Prestbo
Last Update: 12:01 AM ET Nov 18, 2009
NEW YORK (MarketWatch) -- Stock markets outside the United States are recuperating much faster from the bear's mauling. Accordingly, many investors have been pouring money overseas, which is one reason why non-U.S. stocks have been advancing so strongly.
The Dow Jones Global Total Stock Market Index, which includes 11,745 stocks in 64 countries, jumped 29% this year through Oct. 30. That advance reflected a 23.5% decline from the beginning of the year through March 9 and a following lift-off rally of 68.7%.
By contrast, the 10-month gain for the U.S. market was 18.4%. (All performance figures are on a total return basis, which means dividends are included.) The early-year decline was just a shade worse in the U.S., and the subsequent jump trailed the global recovery by 12 percentage points.
"Global," however, includes the United States. By excluding that market, the discrepancy becomes even more pronounced: "Ex-U.S." markets sank 22.7% in the first part of the year -- two percentage points less than U.S. stocks -- and then rocketed 77.8% to post a 10-month increase of 37.4%, or more than double that of U.S. stocks.
'Ex' marks the spot
Investors don't necessarily realize the effect their investments have had on these markets. Ex-U.S. (a.k.a. international) markets are divided into two main types, developed and emerging. The former are fewer in number (29) but bigger in market capitalization ($14 trillion), while the latter are in exactly the opposite condition (35 countries with $2.8 trillion in market cap).
Emerging markets tend to be among the most volatile because investment capital surging in and out can move prices a lot, largely because liquidity is lower. Despite that tendency, the DJ emerging market index fell just 15% in the first couple months of the year, or roughly eight-to-10 percentage points less than its counterparts.
Partly because of that resilience, perhaps, the next eight months brought a literal doubling of returns -- up 100.3%. The result: emerging markets logged a 10-month return of 70.2%, luring investors out of domestic tranquility to roam the globe.
Developed markets showed far less pep, but still beat U.S. performance. They dropped a more-typical 23.8% early in the year, and then jumped 74% for a 10-month gain of 32.5%.
The biggest gainers among developed markets -- mostly because of large-stock outperformance -- were Cyprus (90.7% higher), Norway (up 79.8%) and Sweden (a 71.1% gain). Bringing up the rear were Iceland (slipping 0.3%), Japan (up 7.1%) and Malta (15% higher).
Emerging markets leaders include Sri Lanka (up 140.46%, driven by big gains in all three size categories), Indonesia (116.98% higher, propelled by surges in both large- and mid-sized stocks) and Brazil (a 111.57% advance, mainly in large stocks). On the back end were Slovakia (down 24.7%), Jordan (6.8% lower), and Bahrain (off 3.9%).
Small scores big
Small stocks were the best performers in both developed and emerging markets by wide margins over mid-sized and large stocks. That is a departure from the U.S. pattern in which mid-sized stocks did better than large or small.
On Oct. 30, small stocks were 48% higher than at the start of the year among developed countries and a stunning 87.7% higher among emerging markets. By contrast, mid-sized stocks were up 39.5% (developed) and 72.9% (emerging), while large stocks gained 30.5% (developed) and 67.5% (emerging).
Leading the small-stock surge among emerging markets were Russia (a 193.4% surge), the Philippines (up 156.4%) and Sri Lanka (128.9% higher). Laggards were Jordan (down 8.5%), Kuwait (5% lower) and Morocco (up 5.3%).
In the developed-market camp, the best performers were Israel (up 131%), Hong Kong (a 108.6% gain) and Austria (104.5% higher). The stragglers were Cyprus (down 1.4%), Malta (off 1%) and Iceland.
Strong sectors
Basic Materials was the big winner among ex-U.S. industries, jumping 50.4% in developed countries and 106.6% in emerging markets. Industrial metals and mining were the hottest sectors.
Utilities did the worst among the 10 industries in developed countries, edging up just 0.03% in the 10 months. Among emerging markets, Telecommunications took the hindmost with "only" a 27.81% gain.
Looked at another way, though, Health Care was in the best position as of Oct. 30 because it was down only about 10% from the market peak in 2007. In a near-tie for second and third by this measure were Oil & Gas (roughly 18% below peak) and Consumer Goods (about 19% lower).
Beleaguered Financials, of course, remain farthest (40% lower) from the market's 2007 high, followed by Industrials (down 32%) and Technology (off 31%). The remaining industries -- Basic Materials, Consumer Services, Telecommunications and Utilities -- are all 20% to 28% lower.
If capital continues to pour into ex-U.S. markets, it could flow to those countries and industries that have not risen as far or fast as the 10-month winners. If capital starts to pour out, the big gainers thus far are the most vulnerable.
John Prestbo is editor and executive director of Dow Jones Indexes, a unit of Dow Jones & Co., Inc., publisher of MarketWatch. Ross Wiedman and Rowena Phatak contributed research to this report.
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