We often talk about “the market” without clearly defining it. Actually, many markets exist and it is crucial to define which market we’re talking about to avoid confusion. For Easyvest, the market is made of all the companies that are traded on a stock market in the world. While it is impossible to invest on the whole market today, technological developments suggest it might be possible in the future.
In a previous post, we showed that no professional investor could beat the market in the long run. We believe it is important to define precisely what we mean by “the market”.
A market is a place where buyers and sellers can meet to trade goods or services. According to that definition, there are millions of markets in the world. For instance, the Midi market in Brussels is a market.
In finance, a market is a place where investors can trade financial instruments like stocks or bonds, but also more exotic instruments like options. When professional investors evoke a market they usually refer to a basket of stocks of the largest companies traded on an exchange in a given geography. Each word in the last sentence has its importance, we’ll come back to it in a moment… That type of markets always has an index that follows its performance.
For instance, the BEL20 is the index that tracks the performance of the 20 largest companies traded on the Belgian stock exchange. The Euro Stoxx 50 tracks the performance of the 50 largest companies traded in Europe, and the S&P500 is the index tracking the performance of the 500 largest companies traded in the United States.
The most common sense given of the words “financial market” is rather narrow and one should not be tempted to compare a financial market to an economy as a whole. Indeed, a financial market mostly refers to a stock market and ignore bonds. It includes only stocks listed on an exchange while many companies are of course not listed. Besides, it is often limited to large capitalizations, excluding small or medium companies. Finally, a financial market might designate small geographies insignificant across the globe, like Belgium.
From a theoretical point of view, the market includes all the stocks from all companies traded on a stock exchange in the world whatever their size, country, or industry. Thus, the market contains large Belgian companies selling beers like ABInbev, as well as large US companies selling consumer electronics like Apple, or small Brazilian companies selling wooden panels like Duratex. You didn’t know this last one? Me neither.
According the World Federation of Exchanges, the market counts approximately 50.000 companies having an overall trading value of 57 trillion euros. This is more than 100 times the Belgium gross domestic product! An investor who wishes to invest in the market would have to buy shares all these companies.
The “investable” market
Unfortunately, it is too expensive or even impossible to invest in the whole market in practice. Indeed, imagine a small company traded on the Bangladesh stock exchange. Even if that company were to issue millions of shares to serve the needs of all investors in the world, the value of those shares would be tiny compare to the transaction costs that would be incurred to acquire a share. It would never be profitable for an average retail investor to invest in that company. Also, certain stocks are simply not accessible. This is for instance the case of some Chinese stocks currently reserved to Chinese investors exclusively.
So, what it the “investable” market? The company MSCI (Morgan Stanley Capital International) estimates that the market really investable counts around 9.000 companies representing 35 trillion euros.
The MSCI World Index is the key reference for professional investors when talking about the global market. However, few realize that the MSCI World only represents the large and medium companies of 23 developed markets. This means circa 1.700 companies representing 80% of the investable market value. Any retail investor can easily invest in this index through one of the 18 ETFs listed in the world that track it.
The MSCI ACWI (All Country World Index) gets closer to the investable market by adding the large and medium companies of 23 emerging countries. It counts 2.400 companies representing 85% of the investable market. We list 7 ETFs that track this index.
Then, the MSCI ACWI IMI (Investable Market Index), launched in 2007, adds the small companies. It accounts for 99% of the total investable market. Merely 2 ETFs track this index today. However, with time, we can expect that this index will be more and more used.
Finally, all those indexes don’t include what is called frontier markets with countries like Kuwait, Argentina, or Nigeria. Although these countries represent a tiny fraction of the market, they become popular among retail investors. As financial data coming from these markets becomes more accessible and reliable, it is not impossible to imagine that the MSCI will add those countries in a new global index.
What can we say about the market?
As we observe the market, it is striking to see that the United States occupy a major place with more than 50% of the market value. On the other side, emerging markets like China, Brazil, or India represent less than 10% of the market, even if we have heard a lot about them over the last decade.
Then, large companies are preponderant. Finally, consumer goods are the largest sector, followed by the financial sector, and the technology sector.
And Belgium you might ask? Well, its weight in the market is minuscule: less than 0,5%!