thinking out loud about Euroland (II)

Euroland is small

Yesterday, I tried to argue that in world economic terms the Eurozone is smaller than many investors believe and that, therefore, even a severe recession there next year will only have a mild negative impact on global growth prospects.

There are two additional economic factors to consider–trade and investor expectations.


Ex oil, most trade among Eurozone members is with each other.  Sales to the EU from China–Europe’s largest external trading partner–amount to less than 3% of the economy of either.  The same is true for business between the US and the EU.

Trade usually rises and falls faster than a country’s overall economy, though.  So a 5% decline in Eurozone GDP next year might translate into a 10% decline in imports.  Certainly not a good thing, but not by itself a disaster, either.

investor uncertainty

To my mind, the bigger issue by far is investor uncertainty.  Such fears typically turn out to be wildly overstated.  That knowledge doesn’t help much, however, if it’s your portfolio that’s being swamped by waves of irrational selling.

Even though Americans have been investing in foreign stock markets in a serious way for almost thirty years, I think most people still don’t understand that there isn’t a one-to-one relationship between world economies and world stock markets.  The relationship works for bonds, which comprise a much larger class of securities, but not for equities.

There are two reasons for this:

–in most countries, large portions of the economy have no publicly listed companies.  In the US, for example, the real estate, housing and auto sectors, all of which are important for GDP growth, have very little stock market representation

–in many countries, the owner of a domestic enterprise can easily be a foreign company.   In this case, the owner’s main public listing is probably in a foreign country–if it is listed at all.  Again, it contributes to GDP but has no local stock market presence.   TIF, for instance, is a US company but earns money and adds to GDP in the EU, Japan and China.  Ikea is a global furniture company founded by a Swedish entrepreneur.  It’s incorporated in the Netherlands and not publicly traded anywhere.

world stock markets by size

In world stock market terms, the Eurozone is smaller than it is in a macroeconomic sense.

The world stock markets open to foreigners break out roughly as follows:

US          45%

Eurozone          11%

rest of Europe (mostly the UK, with a dash of Switzerland and Sweden)          13%

Japan          9%

Canada + Australia          8%

emerging markets          14%.

Slicing the Eurozone up a bit further, the area’s main components are Germany and France, which together make up more than half the total.   By far the biggest sector is financials.

Unfortunately, there’s no reliable information I’m aware of to sort out the relationship between where companies in continental Europe may be listed vs. the countries where they make their money.  I think we should assume that all financials are pan-European enterprises, no matter where they are listed.  For other sectors, the tendency has been for countries to declare that certain companies or industries are national treasures and can’t be acquired by foreigners.  My guess–and it really is a guess–is that ex financials, most multinational exposure is to non-Eurozone areas.  If so, this exposure would be an economic and stock market plus.


In the parsing of world stock market above, which gets down to the level of markets that make up as little as 2% of the world’s stock markets, Greece, Italy, Portugal and Spain don’t show up at all. They’re that small.

In terms of investor concern that’s depressing overall European markets, then, the issue has got to be either the indirect effects on business in France and Germany of problems in smaller Eurozone economies and/or the negative effects on the very large banking sector.  My guess is that the negative signal European markets are giving is much more the latter than the former.


Tomorrow–how to structure an equity portfolio in light of European stock market weakness.

Leave a Reply

%d bloggers like this: