In 2019, over 60% of global economic growth is expected to come from Asia. That’s according to a new article by VisualCapitalist, which compares the relatively slow-growing developed markets to the rapidly growing emerging markets (adjusted for purchasing power parity).
As you can see in the chart below, the United States, the Eurozone, the UK, etc. aren’t expected to be the major drivers of global growth this year.
The index I work on, VIEQX, tends to be more invested in the regions that are expected to grow most, and less invested in the countries that are expected to grow least.
We’ll look at some examples:
- As of 3/22/2018, in emerging Asia, the region that’s expected to contribute the most by far to global growth, we have a weighting of 20.3%, and ACWX (a cap-weighted index) had a weighting of 15.4%.
- In developed Europe, a region projected to contribute less than 10% of global growth this year, we have a weighting of 34.1%, and ACWX weights them at 45%.
- In countries such as the UK and Canada, expected to account for less than 1% of global growth each, we have weightings significantly lower than cap-weighted.
- VIEQX holds the UK at 5%, and cap-weighted holds them at 10.3%; for Canada, we hold them at 4%, and cap-weighted holds them at 6.6%.
Developed European countries are not as dynamic as they once were. They simply don’t grow fast anymore, but cap-weighted has nearly half their investments there.
You can see in the chart below what trajectory various regions are on, and it doesn’t look good for the type of countries a cap-weighted approach privileges.
This is because cap-weighting is past weighting. It privileges once-great economies, even when they’re no longer growing at rates that justify such high weightings. If you’re interested in investing in the countries that are the most dynamic, that are expected to grow the most, this data shows that a cap-weighted approach is probably not the best idea.