Globalisation declining? Not in investor portfolios

The pandemic will reverse globalisation. 

For some it’s a prediction, for others an aspiration. The virus’ rapid spread across the globe highlighted the fragilities of an interconnected world. Turning inward, increasing self-sufficiency, decreasing dependence on global linkages are plausible responses.

While global travel certainly ground to a halt in 2020, business does not appear to have become less global. That’s the conclusion reached when examining the revenue mix of publicly traded companies, aggregated to the index level.

The world map below displays the share of revenue earned domestically for 49 markets across the globe, represented by Morningstar country indexes.[1] Estimates based on annual report data from 2020 shows only 13 countries becoming more domestically focused in 2020. Meanwhile, 29 markets became more globalised, with the share of revenues sourced outside the country increasing between 2019 and 2020.

Nearly all Asian markets became more global in 2020, and the US held steady at 63 per cent domestic. The Morningstar Australia Index, which covers 97 per cent of local market capitalisation, was among the minority to turn inward in 2020. Approximately 55 per cent of revenues were sourced domestically in 2020, up from 53 per cent in 2019.

Consider the revenue mix of the Morningstar Australia Index

Australia’s inward turn paralleled the country’s closing off to the rest of the world during the pandemic. Of the 45 per cent of market revenues coming from outside the country, Morningstar estimates Emerging Asia (largely China) as the largest source (12.4 per cent), the US at nearly 12 per cent, followed by small contributions from New Zealand, the Eurozone, Japan, and the UK Companies report geographic revenue exposure in different ways, so precise attribution is impossible.

To understand Australia’s aggregate numbers, consider three of the largest Australian companies: Westpac (WBC), BHP (BHP), and CSL (CSL).

Westpac, like the other large banks, is largely a domestic player. Amidst a depressed pandemic economy, Westpac saw a decline in revenue in all its markets. But revenues from New Zealand and ‘Other Overseas’ sources fell by a larger percentage than its Australia-sourced revenue for the fiscal year ending 30th September 2020. So its overall revenue mix turned slightly more domestic.

Source: Pitchbook (Click to enlarge)

BHP, by contrast, saw an increase in revenue from China, both in absolute terms and as a share of its total. It reported nearly 62 per cent of revenue coming from China in its report filed in September 2020, up from 55 per cent the previous year. This reflects robust Chinese recovery and depressed demand from markets like Japan, Australia, and North America.

Finally, CSL now earns more than half its revenue from the US, where revenues grew in both absolute terms and a share of its total. CSL earned just 8.3 per cent of its revenues from Australia.

Healthcare companies like CSL tend to be especially global, whereas banks like Westpac tends to be domestic. Healthcare contributes to the outward focus for markets like Denmark, Switzerland, and the UK.

Technology tends to be a global sector across markets. US companies like Apple, Facebook and Google-parent Alphabet all earn the majority of their revenues from outside the US). In Asia, Taiwan Semiconductor and Korea’s Samsung Electronics contribute to the outward orientation of their markets. China is an exception, as companies like Alibaba and Tencent are largely domestic players.

Sector weights help explain the inward orientation of many emerging markets, such as Egypt, Peru, and the United Arab Emirates.

Revenue share becomes more global for Brazil, less global for Russia, but with little dramatic change

Brazil’s market became significantly more global in 2020, falling to 68 per cent domestic from 77 per cent in 2019 based on estimates from corporate filings. What’s going on? Iron ore miner Vale (VALE) and Petrobras (PBR), the oil and gas company, which together represent roughly 20 per cent of the Morningstar Brazil Index’s market value, each saw a decline in their share of revenue sourced domestically.

This is undoubtedly due to Brazil’s struggles with covid-19. As the pandemic has ravaged the country, causing the economy to contract by more than 4 per cent in 2020 and unemployment to climb above 14 per cent, Vale reported its share of revenue sourced from China increasing to 57.82 per cent in 2020 from 48.55 per cent in 2019. Vale, like BHP, benefitted from robust Chinese demand.

Russia also went more domestic in 2021, likely as an effect of sanctions undermining global revenues for some Russian businesses.

Across Asia, most markets became more global. Japan, China, Korea, Hong Kong, Taiwan, Singapore, Indonesia, Malaysia, Thailand, and the Philippines all saw an increase in the shares of revenues sourced globally in 2020. India did not change. Only Pakistan and a couple of Persian Gulf markets became more domestic.

A key distinction between a country's economy and equity market

Globalised revenue streams provide yet another reason that investors should distinguish between a country’s economy and its equity market. One of the great investment lessons of 2020 is that the two can move in opposite directions. Although national equity-market indexes are often cited as barometers of their countries’ economic health, markets are a collection of very specific companies influenced by a variety of forces, macro and micro, domestic and global.

This is especially true of European equity markets. The Netherlands, Switzerland, Ireland, Denmark, France, Finland, Sweden, Germany, the United Kingdom, and Belgium all earn 70 per cent or more of their revenues abroad. The Morningstar France Index, for example, is hardly a proxy for the French economy. Luxury-goods maker LVMH Moet Hennessy Louis Vuitton (LVMHF), the largest public company in France, derives more than one third of its revenues from Asia and roughly one fourth from the United States. Drugmaker Sanofi (SNYNF), the second-largest French company, reports the US as its largest market.

The UK equity market already reflects the “Global Britain” envisioned post-Brexit. Just 27 per cent of revenues are sourced domestically. Morningstar estimates that roughly 23 per cent of the UK market’s revenue came from the US in 2020, 17 per cent from emerging Asia, and 12 per cent from the eurozone.

The world’s most domestically oriented equity markets belong to emerging economies with large populations, topped by Egypt, Pakistan, Indonesia, and China. India is an exception to this rule, being far more global than China and others. This owes to IT service providers like Infosys (INFY) and Tata Consultancy Services (TCS), which both earn the lion’s share of revenue abroad, mostly in the US and Europe.

Globalised revenue streams have been cited by some as reason to avoid investing internationally. If domestic companies are doing business around the globe, doesn’t that count as geographic diversification? Global interconnectedness has surely contributed to higher correlations between stock markets around the world.

But investors with significant home-country bias are narrowing their opportunity sets and eschewing great investment opportunities--companies that could even be leaders in their home markets. For example, a U.S.-based investor who doesn’t own Novo Nordisk (NVO) of Denmark is missing one of the leaders in diabetes therapies serving the U.S. equity market, while Taiwan Semiconductor (TSM) is a leading chip-supplier to the US. In fact, the US share of Taiwan Semiconductor’s revenue increased to 61 per cent in 2020 from 59 per cent.

Corporate data from 2020 does not support the view that globalization is in decline. For investors, thinking globally remains critical.

[1] Index-level data is as of 30 April 2021, based on the most recent corporate filings, typically 2020 annual reports. Company-level revenue data represents 99.4% of global market capitalization across developed and emerging markets. Data has been collected for 7,311 of the 7,391 constituents of the Morningstar Global Markets Index, of which the individual country indexes are carve-outs.

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