Catherine Yoshimoto
- The US dominance of global stock markets has been so long-running as to feel permanent, but not long ago the US’s weight in a global index was almost overtaken by Japan, which is now barely a tenth of the size of the US.
- China, India, Taiwan and South Korea now add up to a tenth of global indices, despite relatively recent inclusion.
- The relentless rise of the US market has recently been down to its mega-cap tech stocks and their valuations.
There is nothing so permanent as change. And nowhere is this truer than when it comes to the respective sizes of the world’s stock markets.
Japan’s boom to bust
Some readers may be old enough to remember the great Japanese asset price boom of the late 1980s, when 1.14 square kilometre of land under the Imperial Palace in Tokyo was valued at more than all the 424,000 km2 of real estate in California.
This rated prime Tokyo real estate at 350 times more valuable than the choicest property in Manhattan.
We all know what happened next: Japanese interest rates went up, the property and stock markets deflated, the country entered a ‘lost decade’, and then another…and then another.
Two snapshots of global equity markets
The shift in the footprint of global stock markets between the late 1980s and today can be seen in the two pie charts below.
The first pie chart shows the country weightings of the FT-Actuaries World index in September 1987—when Japan’s stock market more or less equalled the US for size.
The second pie chart shows the country weightings of the FTSE All-World index as at September 2023, 36 years later—by which time Japan’s country weighting was only a tenth that of the US.
FT-Actuaries World Index Country Weights September 30 1987
Source: FTSE Russell, as at 30 September 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures
FTSE All-World Index Country Weights 30 September 2023
Source: FTSE Russell, as at 30 September 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures
The FT-Actuaries World index, developed in 1986, was FTSE Russell’s first global equity index, originally consisting of 23 countries. It is the direct forerunner of today’s FTSE All-World index, which now covers 49 equity markets. The FTSE All-World was expanded in the early 2000s to include several emerging markets and smaller-capitalisation stocks with the launch of the FTSE Global All Cap Index. How we determine the eligibility of markets for inclusion in our global equity indices is described in detail in FTSE’s Country Classification process.
The relentless rise of the US
The relentless rise to dominance of the US stock market is the single major story embedded in the two charts.
As a result of a multi-decade bear market in Japan, the Nikkei 225 index is still nearly 20 percent below its 1989 all-time high.
Meanwhile, the Russell 1000 index rose almost 1300 percent between September 1987 and September 2023 (2871% with dividends reinvested).
As a result of this prolonged bull market, the United States is now the world’s largest equity market by an order of magnitude. Its biggest companies, like Apple, Microsoft, Amazon, Tesla, Alphabet and Meta, are famous around the world for their products and services.
For the time being, it’s been up, up and away for US mega-cap and tech stock company valuations.
Some bargain-hunters among global investors are now making the case for an increased allocation to Japan. They are not the first to state this argument. Only time will tell if we see the country regain some of its lost market share.
Emerging markets on the rise
It’s not just the Japanese who’ve lost equity market share to the US—Europe has too.
The two pie charts also show how the relative country weights of mid-sized European equity markets have shrunk over the 36-year period: the UK has declined from 10 percent to 4 percent of the global index, while Germany and Italy have also seen a fall in their respective market shares.
But several emerging markets have risen to take a bigger slice of the pie.
What we now consider powerhouse Asian economies—China, India, Taiwan and South Korea—were absent from the FT-Actuaries World index in 1987. But these four markets now represent 8 percent of the FTSE All-World index.
The rate at which equities from these Asian markets have been added to the FTSE All-World index reflects FTSE Russell’s country classification process. This process is designed to ensure that markets only gain access to our global indices once the supporting infrastructure is ready. Domestic China A Shares, for example, were only added to the FTSE All-World in four tranches starting in 2019.
Looking forward
Who knows what the country weights of the FTSE All-World index will be in 2059, 36 years hence? Will the US have lost its dominance? Will Japan rebound? And what about the 21st century economic colossus, China?
If Japan’s story tells us anything, it’s how often the consensus turns out to be wrong.
When the country’s shares hit their bubble peak in late 1989, most observers thought this was the new status quo: that Japan’s clever industrial policy justified ever-increasing share prices, or at least a permanently high plateau for existing prices.
But those people forgot about the risks of industrial overcapacity, hidden private sector leverage and deflation. In hindsight, Japan bulls were suffering from a classic case of confirmation bias.
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