Morningstar - Q3 2020 - 36

Strategies

these five markets made up 68% of world
market capitalization both at the end of 1899 and
at the beginning of 2020. However, their
shares of world market capitalization changed
dramatically over this 120-year period. In
1899, at 25%, the U.K. had the largest equity
market. At 15%, the U.S. market was about the
same size as Germany's. One hundred twenty
years later, the picture is far different. The

the returns to capital in any broader sense.
In these ancient data, we may be observing a
needle of gold in a haystack of dung.
The Unique History of the United States
E X H I B I T 1 shows the percentage of the world
equity markets made up by the U.S., the
U.K., France, Germany, and Australia at the end
of 1899 and at the beginning of 2020. Together,

U.S. has become the dominant equity market,
with 54.5% of the world's market capitalization,
and the U.K. has dropped to 5.1%. Germany
has dropped from 13% to 2.6%.

EXHIBIT 2

Winners and Losers, After the Fact In 1900, was it predictable that the U.S.,
Australia, and South Africa would be the top-performing markets over the next
120 years?
Real Return and Standard Deviation on Equity Markets for 21 Countries, 1900 - 2019
Compound Annual
Real Return (%)

Standard Deviation (%)

Compound Annual
Real Return (Rank)

Standard Deviation
(Rank)

Local
Currency

U.S.
Dollar

Local
Currency

U.S.
Dollar

Local
Currency

U.S.
Dollar

Local
Currency

U.S.
Dollar

Australia

6.82

6.60

17.50

22.02

2

1

20

18

Austria

0.95

0.09

30.55

37.33

21

21

3

3

Belgium

2.61

2.99

23.35

25.62

19

19

8

11

Canada

5.71

5.55

16.87

19.52

6

7

21

21

Denmark

5.57

5.90

20.71

22.67

7

5

15

17

Finland

5.48

5.43

29.49

32.12

9

8

4

5

France

3.42

3.17

22.90

28.07

17

18

9

9

Germany

3.32

3.42

31.32

79.02

18

17

2

1

Ireland

4.35

4.41

22.89

25.13

13

12

10

13

Italy

2.15

2.13

28.28

32.89

20

20

6

4

Japan

4.21

4.38

29.19

31.36

14

14

5

6

Netherlands

5.10

5.27

21.15

24.34

10

10

13

14

New Zealand

6.43

6.06

19.22

25.14

4

4

19

12

Norway

4.39

4.41

26.48

29.36

12

13

7

7

Portugal

3.64

3.64

33.92

40.74

15

15

1

2

South Africa

7.09

6.09

21.90

29.26

1

3

11

8

Spain

3.59

3.49

21.67

27.83

16

16

12

10

Sweden

5.99

5.66

21.00

23.51

5

6

14

15

Switzerland

4.61

5.34

19.40

20.55

11

9

18

19

U.K.

5.53

5.12

19.60

22.82

8

11

17

16

U.S.

6.51

6.51

19.93

19.93

3

2

16

20

-63.99

-43.58

Country

Correlation (%)

Sources: Dimson, Marsh, and Staunton (op. cit.), Morningstar Direct. Data as of 12/31/2019.

36

Morningstar Q3 2020

-71.43 -66.23

While the figures in EXHIB IT 1 can be interpreted
as evidence of the survivorship bias inherent
in the U.S. historical equity market returns, there
are also fundamental reasons for the rise of
the U.S. to the dominant position in the global
equity market that it has today. Over the past 120
years, the U.S. has gone from an emerging
market to the world's economic superpower. Over
this period, the U.S. greatly expanded in
population, mainly through immigration, which
gave it a labor force large enough to work its
growing industries. U.S. population growth was
much faster than that of the major European
countries, which suffered emigration. Furthermore,
the U.S. is one of the few countries that has
an "equity culture" enabling companies to raise
capital largely by issuing equity, rather than
debt, from a public that does not mind taking risk.
So, while the generous returns of the U.S.
equity market are part of the story behind its
growth, they are not the whole story.
Risk and Return Around the World
EXHIB IT 2 shows the compound annual real
return and standard deviation of real
return on 21 countries in both local currency and
U.S. dollars over 1900-2019. The U.S. shares
the top three spots with Australia and South Africa.
Although Australia and the U.S. are quite
different in size, they both have enjoyed conditions
that have allowed their capital markets to
flourish, namely political stability, recovery from
economic downturns, and limited damage
and quick recovery from wars. In the case
of South Africa, the gold- and diamond-mining
industries have produced handsome returns
for investors.

In EXHIB IT 3 , we plot the compound annual real
returns and standard deviations of the 21
countries shown in EXHIB IT 2 , in local currency.
What is striking about this chart is the negative
relationship between volatility and return, the
opposite of what one might expect. The winning
countries (South Africa, Australia, and the
U.S.) have also had some of the lowest volatility.
Morningstar - Q3 2020

Table of Contents for the Digital Edition of Morningstar - Q3 2020
