Indrani De
Catherine Yoshimoto
- Globalisation may have peaked, considering recent geopolitical tensions, with a potentially greater impact on the Russell 1000 index than the Russell 2000 index.
- A more fragmented world economy may leave many companies and consumers worse off than they would otherwise have been, and may affect the performance of large-cap US stocks, which have benefited from globalisation.
- The Russell 1000 and 2000 indexes will continue to give investors an accurate, representative and timely indication of the US equity market, whichever way the globalisation trend goes.
The Russell 1000 and Russell 2000 indexes (‘R1’ and ‘R2’) have mapped the US equity market successfully for four decades. But did you know the R1 gives you significant investment exposure to the global economy as well?
US vs non-US
The large-cap R1 and the mid- and small-cap R2 are widely seen as ‘domestic’ US equity indexes. They benchmark the largest 1000 US companies by market capitalization, and the next 2000 US companies, respectively.
But the amount of exposure to the global economy in the R1 (in particular) may surprise you.
FTSE Russell recently calculated that the largest 1000 US companies generate nearly 40 percent of their revenues outside the country. The non-US revenue share for the 2000 companies in the R2 is only half that.
| Russell 1000 | Russell 2000 | |
|---|---|---|
| Non-US Revenue % | 39.39 | 19.78 |
Source: FTSE Russell, as of September 29, 2023.
In other words, it’s the Russell 2000 that better represents the domestic US economy and its powerhouse small company segment. It’s from the small-cap R2 that some of the largest current members of the R1 (like Amazon and Netflix) have graduated in the past.
(Amazon joined the R2 in 1997 and moved up to the R1 a year later. For Netflix, the respective dates were 2002 and 2009).
Growth in global trade
To put these foreign revenue figures in perspective, the share of foreign trade in US GDP (measured as the sum of imports and exports, divided by GDP) is around 26% (see the chart). That’s up from just over 15% when the Russell indexes were launched in 1984.
The post-World War II expansion of the global economy has undoubtedly been a story of increasing interconnectedness between countries and markets. We’ve also seen significant advancements in technology, helping drive recent equity market gains.
Investors using the R1 as a benchmark have a higher exposure to the global economy because large- (and especially mega-cap) stocks are highly international in their operations.
When it comes to foreign revenues, this large-cap/small-cap split also occurs in other equity markets.
In the UK, for example, the top 100 companies (represented by the FTSE 100 index) generate as much as 80% of their revenues outside the country, while the mid-cap FTSE 250 has a smaller, 55% non-UK revenue share.
Peak globalisation?
Will this picture of highly international mega caps and more domestically focused small caps stay the same?
In an October 2023 Reuters Breakingviews article, columnist Francesco Guerrera suggested that we may have hit peak globalisation.
Instead, he says, we may be looking at a period of greater protectionism and government support of domestic industry.
“Globalisation has had an amazing run. Over the past seven decades, the world economy has grown 14-fold, powered by a 45-fold expansion in global trade, said Guerrera.
“Yet over the past 15 years that process has stalled. World trade as a percentage of GDP peaked at 61% in 2008. A more fragmented world economy will leave many companies and consumers worse off than they would otherwise have been,” Guerrera went on.
He cited recent geopolitical tensions between the US and China as a primary reason for the trade slowdown.
Not everyone agrees with his prediction. Many hope that global trade will revive after the recent headwinds caused by inflation, higher interest rates, a strained Chinese property market and the war in Ukraine.
Accuracy and timeliness
But if Guerrera’s suggestion is right, maybe in another decade or two we’ll be talking about less globally focused large-cap US stocks than at present.
Meanwhile, the global trade statistics are now being closely studied by investors.
Whichever way the globalisation trend goes, one thing is for sure: the Russell 1000 and 2000 indexes will continue to give investors an accurate, representative and timely indication of economic conditions.
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