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There is much in this world that may sound logical. Like the following arguments:

  • The US economy is surprisingly strong in the face of rising interest rates, so we choose to remain overweight US equities
  • Growth is lacklustre in Europe, hence our limited exposure to European shares
  • When global growth resumes, emerging markets are likely to make a forceful comeback

Such statements abound in my line of business. Considerable resources are devoted to evaluating where to be invested at different times, a.k.a. geographic allocation. After all, there may be sizable return differences between various stock markets and regions.

The relationship between economic growth and stock prices is one of the truly eternal questions. There is no simple answer, although much indicates that the stock market is a better predictor of economic growth than vice versa. When we’re talking about structural growth as opposed to cyclical growth, however, it’s not about prediction – it’s about exposure to lasting sources of growth. But what growth might that be?

The relationship between economic growth and stock prices is one of the truly eternal questions.

Think about it for a minute and you realise that domicile is of little importance. If a Norwegian exporter has no customers in Norway, it really isn’t exposed to the Norwegian economy. At least on the revenue side, which is what we normally think of when we talk about exposure. Factoring in costs and forex effects, the true exposure may in fact be negative. But let’s stick to revenues.

Based on data from FactSet, domestic exposure in the Norwegian OSE benchmark can be estimated at some 44 %, or 38% for the narrower OBX index. The true figure is probably lower, as many suppliers in, especially, the oil-service business have ultimate customers abroad. This figure only measures primary revenues.

US companies come next, at 10-11%. Combined, all other European economies make up almost 30%, while the developed markets share is about 80%. An average investor in the Norwegian stock market thus gets a quite diversified exposure in terms of geography.

This is even more true for the Nordic market. Combined, the four Nordic economies Sweden, Norway, Denmark, and Finland represent no more than one quarter of the total revenues of companies in the MSCI Nordic Countries index, on par with the largest single market – which, rather unsurprisingly, is the US. Here, developed markets account for 74% of revenues. Stating that the Nordic region is a truly vibrant economy, which is true, does not preclude a high share of exports – au contraire.

Even in the widely used S&P 500 gauge you get less than a 59% exposure towards the US economy. Six years ago, it was 70%, so this index has been getting increasingly geographically diversified. So far, no trace of deglobalisation here.

Finding a “true” exposure is a futile effort. Think about the companies representing 59% of S&P 500 revenues – where do they in turn reap their revenues? Some, perhaps, in the US, from companies which in turn sell to altogether different countries. And so forth …

Either way, domicile is a poor gauge of economic exposure. It’s really only essential for one aspect of investing: corporate governance.