Three world views: population, output and equity markets

Judged by where the eight billion people of our planet live, the world is dominated by Asia. China and India account for 18% each of the world’s population, followed by the US with just 4%, Indonesia with 3.5% and Pakistan with 3%.

Some say because of this population dominance in Asia and the good progress India, China and others are making with raising living standards and applying new technology it is now the ‘Asian century’. If we judge it by the amount of income and output countries generate, the world still belongs more to the advanced countries.

Out of total world output or gross domestic product (GDP) of around $100 trillion a year, the US accounts for an important 25% - six times its population share. China is now second at 18%, with Japan and Germany on 4% each, India at 3.3%, UK at 3% and France at 2.8%. The relatively lightly populated advanced world accounts for around half of world output still.

If we judge it by the market value of the quoted companies, the equities you can buy for your endowments and pension funds, the world is dominated by the US. If you look at the position in the MSCI All World equity index, the US accounts for a towering 63% of the market value o quoted world companies. Japan is a poor second with 5.4%, and the UK third with 3.4%. China only manages 2.4% of the total.

Why the US is dominant

If we look at the MSCI Developed Markets equity index, the US constitutes a massive 70%. All the top ten shares by value are US corporations. Seven of them are technology companies, with one bank and one pharmaceutical company. The tenth is Google-owner Alphabet, appearing twice in the list with different share categories both making it to the top ten.

If we compare this to the All World index top ten it is the same, with just one variation. Taiwan Semiconductor makes it into the list, striking out JP Morgan, the US bank. There is just one company in the non US world that is in the bottom part of the top-ten list, and that in turn is a major technology company that does a lot of work with and for the US technology giants.

So, we have two unusual features of the world’s largest companies to explain. Not only why are they US-based, but also why are they mainly technology groups? In past decades, the world’s top company lists have shown more diversification, with energy, industry and other sectors represented and some other countries.

Microsoft, the world’s largest company, now has a market capitalisation larger than most individual stock exchanges of the world apart from the US and Japan. The reason for dominance in both technology and America is the same. The US has led the digital revolution for the free world, pioneering the commercial exploitation of the internet, electronic communications and entertainment, and business and individual computing.

Rolling out artificial intelligence has given it all a bigger boost. Any investor, such as a charity or endowment, needs to understand these forces and make investment decisions based on the investing world as it is evolving.

Are technology stocks valued too highly?

The long march of the successful technology shares has been based on a big switch in the way businesses and people spend their money and live their lives.

We have watched as whole industries have been transformed by digital technology. The advertising industry which thrived on placing adverts on main channel TV programmes and in well-known papers and journals has come to place more adverts on social media and websites. The entertainment industry which relied on TV, cinemas and the stage to put out its programmes and dramas has come to rely more on downloads and time shifting pay TV.

Music comes by downloads rather than discs or records. Much shopping has moved from retail stores to online. Clerical and administrative tasks in offices have been put onto computer software with data stored digitally. Lawyers and accountants research their advice and use standard forms and tables from software to provide their opinions. More learning has switched to online, books have been digitalised and modern cars are part mobile phone on wheels.

All this has meant there has been a large transfer of payment away from the traditional businesses running these activities to the digital providers of software and services to do these things online. Much traditional photography with cameras and films was replaced with mobile phone instant pictures.

The Covid-19 lockdowns accelerated much of this process. It forced people who thought they could not learn how to use the new technology, or people who did not like the impersonal computer approach to overcome their reluctance. People without mobile phones or
computer pads acquired them.

People with them that hesitated to use them fully learned new uses for them. Children needed devices for online learning at home. Grandparents needed to be able to undertake Zoom or Teams calls to keep in touch with family. Government and big business began trying to force us all to interact with them by computer rather than by phone or in person. Businesses bought technology for staff to allow homeworking. The result was a further surge in buying and using appliances, and in paying money to the large US service providers for the privilege.

The dominance of Google, Microsoft, Amazon and Meta

Most people and businesses run their computers on Microsoft software. Most of us use Google search, belong to groups on apps like Whatsapp and buy online from Amazon. We may well have our photos and data stored in the Cloud run by Amazon Web Services. One of the clever things has been the way payment has been disguised or directed away from the main customer.

There are free services supplied by the US giants, paid for by adverts on their net pages. Some are remunerated by the trader rather than the final customer, so the digital cost is rolled up in the final price of the good or service being bought by a retail customer. Software packages may be included in the original cost of the computer equipment being acquired.

The US giants know so much about us all. We trust Amazon with plenty of information about who we are, where we live and how we pay. They can work away at offering us more service for additional fees, as they have done with their Amazon Prime system where people pay a regular service charge to be given better deliveries and a wider range of services.

Artificial intelligence offerings often start with a free version but encourage the user to pay for a better one. These companies so far have retained a hunger to serve more customers, and to do more things for the customers they have already got to know. Traditional businesses in Europe with good brands have had to adapt
their business model to operate in a new world of mobile phone orders, Microsoft software for businesses’ development and invoice fulfilment, and Amazon work to help sell product and store data.

Nvidia and TSMC

All this technology needs huge quantities of ever-more sophisticated silicon chips and software design. Nvidia has a current lead in artificial intelligence and cloud processing in data centres.

Its turnover has been leaping forward, and its margins have swollen given the strength of order interest compared to productive capacity. Taiwan Semiconductor Manufacturing Co (TSMC) has also prospered from its ability to make the latest state-of-the art chips. It has been persuaded to put in substantial additional capacity into the US as part of President Biden’s onshoring drive to get the US less import dependent in this crucial area.

Any charity investor will want to take advice and ensure a good spread of risk with a range of differing investments. This year it may well be that some of the sectors and shares that have languished as the technology giants have roared onwards will find buyers and more support.

We still need food to eat, energy to power us, and a range of physical goods. We want personal services and the human touch, as well as the wonders of the mobile phone and iPad world. The last few years have been years of exceptional US achievement, led by a small group of revolutionary companies out to change
the way we live. This is what the current market values are telling us. Some of those companies deserve their high ratings as they continue to perform well.

As Tesla has shown, the market is less forgiving if growth falters.