The Composition of the Global Real Economy and Public Equity Markets

16 Pages Posted: 18 Apr 2015

See all articles by Laurens Swinkels

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

Yan Xu

University of Groningen - Faculty of Economics and Business

Date Written: April 16, 2015

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.

Keywords: Economic growth, Equity market, GDP, Investments

JEL Classification: E01, F23, F60, G15, L16, O47

Suggested Citation

Swinkels, Laurens and Xu, Yan, The Composition of the Global Real Economy and Public Equity Markets (April 16, 2015). Available at SSRN: https://ssrn.com/abstract=2595305 or http://dx.doi.org/10.2139/ssrn.2595305

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Yan Xu

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

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