Geographic Regions in the GFD Indices, Part 2
Bryan Taylor, Chief Economist, Global Financial Data
Southern Europe
Southern European countries border the Mediterranean and include France, Spain, Portugal and Italy. The Paris Bourse was founded in 1724 and has been the largest exchange on continental Europe since the 1700s. It reorganized as Euronext Paris in 2000 along with the Brussels and Amsterdam exchanges. Regional exchanges existed in Lyon, Bordeaux, Marseille, Nantes, Toulouse, Lille and Nice. The primary exchange was the parquet in each city and secondary trading occurred on the coulisse.
Spain has four primary stock exchanges in Madrid (1831), Barcelona (1915), Bilbao (1905) and Valencia (1980). The Milan Stock Exchange was founded in 1808. Regional exchanges existed in Naples, Turin, Trieste, Venice, Genoa, Florence, Rome (1802), Bologna and Palermo. In 1997 all of the exchanges were merged into the Borsa Italiana. Portugal had two primary exchanges in Lisbon (1769) and in Porto (1891) which now form Euronext Portugal.
Figure 9 compares the performance of the French, Spanish and Italian stock markets since 1890. The indices are provided in US Dollars since all three countries have suffered from inflation during the past 100 years. This enables us to provide a direct comparison of the three countries. As can be seen, there was almost no progress between 1890 and 1980, rising prices occurred between 1981 and 2008 and stagnation since then. Of the three, France has had the best performance and Italy the worst. The timing of bull and bear markets has been similar between the three.
Figure 9. France, Spain and Italy Stock Price Indices, 1890 to 2022
Eastern Europe
Eastern European countries suffered from disruption during the twentieth century because Communist countries closed their exchanges. Russia, the Czech Republic, Hungary and Poland all saw their exchanges shut down under Communism as did Bulgaria and Romania. Although Greece was never a Communist country, its geographic location makes it part of eastern Europe. Even though Greece didn’t suffer from Communism after World War I, it did suffer from high inflation. The Bratislava stock exchange (1993) in Slovakia is too small to include in the Eastern European index as are the stock markets in Talinn in Estonia, (1995), Riga in Latvia (1993) and Vilnius in Lithuania (1993).
The St. Petersburg Stock Exchange opened in 1865, was closed under the Communists in 1917 and reopened in 1991. The Warsaw Stock Exchange originally opened in 1817 when it was part of Russia. The Warsaw exchange closed in 1939 when Poland was occupied by the Soviets and Germans and reopened in 1991. The Czech Republic and Hungary were originally part of Austria-Hungary and shares from each country traded in Vienna. The Prague Stock Exchange opened in 1871, closed in 1948 and reopened in 1993. The Budapest Stock Exchange originally opened in 1864, closed in 1948 and reopened in 1990. The Bucharest Stock Exchange originally opened in 1882, was closed in 1945 and reopened in 1995.
The performance of the four primary Eastern European markets since 1994 is compared in Figure 10. Prices are converted into US Dollars to avoid the impact of inflation. Of the four, Russia has provided the best returns, though it remains below its 2008 peak. The same is true of Budapest. None of the four markets has provided superior returns over the past 30 years.
Figure 10. Russia, Poland, Hungary and the Czech Republic Price Indices, 1994 to 2022
Americas
The Americas break down into two groups: North America and Latin America. While the United States and Canada have two of the most developed financial markets in the world, Latin American countries have struggled to develop their economies. As Figure 11 shows, North American stocks have far outperformed Latin American Stocks since 1825. This was particularly true between the 1860s and 1960s when Latin American stocks made no progress while North American stocks marched ahead. This pattern has continued since 2008. Latin American stocks have made no progress during the past 15 years while North American stocks have continued to rise.
Figure 11. North American and Latin American Stock Price Indices, 1825 to 2022
North America
North America includes two countries, the United States and Canada. The two former British colonies have been integrated with each other during the past two hundred years and there is a very strong correlation between the behavior of their two stock markets as is illustrated in Figure 12. The capitalization of the United States is the largest in the world, and although Canada’s market is about 5% of the size of the United States, it is still the fifth largest stock market in the world. Canada relies more on resource stocks than the United States and when technology does well at the expense of resource stocks, the US stock market forges ahead of Canada. During the 1950s, between them Canada and the United States represented about three-fourths of global market capitalization.
Both countries provide diverse economies with historically many regional and primary exchanges. The United States can be broken down into four groups of exchanges: the New York Stock Exchange, the New York Curb Exchange/AMEX, the regional exchanges and the over-the-counter market. During the twentieth century, the New York Stock Exchange represented the majority of capitalization in the United States. The New York Curb/Amex provided smaller companies an opportunity to grow. Many of the companies that originally listed on the Curb/Amex moved to the NYSE as they grew. Up until World War II, regional exchanges in Boston, Philadelphia, Chicago, Baltimore, San Francisco, Los Angeles, Pittsburgh, New Orleans and other cities helped local companies to raise capital. The over-the-counter markets enabled banks and insurance companies, as well as small companies to issue shares to the public. During the twenty-first century, the New York Stock Exchange and NASDAQ represent over 90% of the companies and capitalization that are traded in the United States.
Historically, Toronto (1861) and Montreal (1874) provided the main exchanges in Canada. Until the 1950s, Montreal was the largest stock exchange in Canada, but during the 1960s Montreal faced political problems and French became the predominant language in Quebec. Toronto eventually became the primary stock exchange in Canada and in 2007, the TSX Group acquired the Montreal Stock Exchange. The Vancouver Stock Exchange (1906) enabled resource stocks to raise capital. In 1999, it merged with the Alberta Stock Exchange (1913) to form the Canadian Venture Exchange which is now known as the TSX Venture Exchange.
The performance of the stock markets in the United States and Canada is illustrated in Figure 12. As can be seen, the two countries’ stock markets are highly correlated and have done well over the past 200 years. The United States has provided higher returns than Canada.
Figure 12. United States and Canada Price Indices, 1835 to 2022
Latin America
Latin America includes countries in the Western Hemisphere other than the United States and Canada. They were all settled by either the Spanish or the Portuguese and none of them has attained the standard of living available in the United States or Canada. Seven countries are included in the Latin America index: Brazil, Chile, Argentina, Mexico, Colombia, Peru and Venezuela. Brazil has the largest market with Mexico about one-third of the size of Brazil. All other Latin American markets are small by comparison.
All of these countries have listed shares in New York and in London. The first Brazilian and Mexican companies listed in London in 1825. Because none of these countries was directly involved in World War I or World War II, there is no discontinuity in the history of their stock exchanges.
The Bolsa Nacional was founded in Mexico City in 1886 and merged with the Bolsa de Mexico in 1895 and is currently known as the Bolsa Mexicana de Valores. The Bolsa de Valores do Rio de Janeiro was founded in 1845 and the Bolsa de Valores de Sao Paulo in 1890. The Bolsa in Brazil is now known as B3 S.A. (Brasil, Bolsa, Balcăo). The Bolsa de Comercio de Buenos Aires was founded in 1854. The Bolsa de Comercio de Santiago in Chile was founded in 1893. The Bolsa de Valores de Lima in Peru was founded in 1860. The Bolsa de Bogota was founded in Colombia in 1928 and merged with the Bolsa de Medellin and the Bolsa de Occidente in 2001. The Bolsa de Valores de Caracas Venezuela was founded in 1947.
The performance of the Latin American stock indices is compared in Figure 13. As can be seen, there is very little coordination between the indices. The Mexican stock index has had the worst performance over time while the Brazil, Argentina and Chile indices have provided similar returns. None of the indices have made any progress since 2010.
|
|
|
|
|
|
|
|
Figure 13. Brazil, Mexico, Argentina and Chile Stock Price Indices, 1954 to 2022
Non-Regional Groups
GFD calculates indices for a number of non-Geographic categories that researchers often use to analyze the markets. The four non-regional groups which GFD provides indices for are the Anglo countries, the G-7, the Euro-11 and the BRICS.
The Anglo countries is not a grouping which is often referred to, but it is important because all six of the member countries have a similar history because they were each colonies of Britain in the past, have adopted British law and have placed an emphasis on open markets. Between them, these countries have always represented over 50% over global stock market capitalization and often as much as 80% of global stock market capitalization. The six Anglo countries are Great Britain, Ireland, the United States, Canada, Australia and New Zealand. All the countries, except Great Britain, were able to avoid the destruction of World War I and World War II and avoided the nationalizations that followed World War II. All of the countries have provided consistent returns to investors and have avoided default on government bonds.
The G-7 countries are the largest economies in the world. The group was formed in 1973 as an ad hoc meeting of finance ministers and has grown into an annual meeting among the leaders of the member countries. The members are the United States, Canada, France, Germany, the United Kingdom, Japan and Italy. Russia joined in 1997 forming the G-8, but Russia was kicked out of the group in 2014 after Russia annexed Crimea.
The Euro-11 are the original eleven members of the Euro currency when it was introduced in 1999. This includes Germany, the Netherlands, Belgium, Luxembourg, France, Spain, Portugal, Austria, Finland, Italy and Ireland. Since the Euro was introduced, eight additional countries have adopted the Euro.
The BRICS is a group of the largest emerging markets. The four original members included Brazil, Russia, India and China. Some people have added South Africa as a fifth country in the group. There is very little correlation between the performance of the BRICS countries. The only thing they have in common is that they are large, emerging markets.
Figure 14. Anglo, G-7 and Euro-11 Price Indices, 1792 to 2022
Each of these groups are driven by economic similarities between the member countries and provide a good contrast to the geographic regions mentioned above. Figure 14 compares the performance of the Anglo countries, G-7 countries and Euro-11 countries from 1792 to 2022. The Anglo countries have clearly been the best performers of the group while the Euro-11 countries have been the worst. The G-7 includes the largest components of both the Anglo and Euro-11 groups and so the results fall in between the Anglo and Euro-11 indices.
Excluding Groups
Another important group of the indices are the Excluding Groupings. At different points in time, several countries have represented a large portion of global market capitalization. By removing those countries from the indices, you can remove that country’s influence on the overall index. The two most important countries that are removed from the indices are the United States and the United Kingdom. Both countries, at some point, have represented 50% of global market capitalization. There are five indices that exclude one or both of these countries from the indices. These are
Developed and All World x/USA
Developed and All World x/North America (USA and Canada)
Developed and All World x/USA and UK
Developed and All World x/UK
Developed and All World x/Anglos
Developed and All World x/G-7
Figure 15. World Excluding North America, G-7 and Great Britain Price Indices
The performance of the x/USA, x/North America and x/Anglo indices is very similar because the United States represents such a large portion of the North America and Anglo indices. Figure 15 compares the performance of the World excluding North America, G-7 and Great Britain Indices from 1792 to 2022. Excluding Great Britain provided the highest return inferring that Great Britain underperformed North America and the G-7 countries in the past. The lowest performing index is the Excluding G-7 index inferring that the smaller countries in the world outperformed the larger countries.
The only other indices that exclude countries from their calculations are the European Indices. A Europe excluding the United Kingdom and a Europe Excluding the United Kingdom, France and Germany is calculated. Although Switzerland’s market cap is greater than Germany’s, the remaining European countries have a much smaller market cap.
Figure 16. World, Europe and Europe x/Great Britain, France and Germany Indices, 1792 to 2022
Figure 16 compares the performance of the World, Europe and Europe x/Great Britain, France and Germany indices. The World index has outperformed the European indices. The performance of the world and European indices were very similar until 1914, primarily because Europe represented such a large portion of the World index, but after 1914, the United States represented a larger portion of global market capitalization and the World Index outperformed the European Index. The worst performer has been the Europe x/Great Britain, France and Germany index. The smaller countries in Europe have underperformed the larger countries.
Conclusion
Global indices are calculated by the primary index providers: MSCI, S&P Global and FTSE Russell. Between them, these three companies probably calculate over one million indices to fit the needs of any portfolio manager. However, what all of these companies lack are long-term historical indices that enable investors to track the performance of global indices over multiple market cycles.
MSCI has the longest history since they were the first company to calculate a world index in 1969. S&P’s indices begin in 1989 and FTSE’s indices begin in 1987. Stocks have been trading for five centuries, not for five decades, so the short histories which these global indices provide prevent money managers from understanding how markets respond to world war, hyperinflation, trade restrictions, political chaos and other events that have happened over time.
Global Financial Data not only provides long-term indices covering centuries of data for stocks, but provides similar indices for bonds and bills. No other data provider is able to provide a century of history for global markets, as well as data for dozens of regional and non-regional indices. GFD provides 40 different indices that enable analysts to compare the performance of regions with one another as well as the performance of individual countries with the regional indices.
Understanding the long-term performance of the stock market over the past four centuries has enabled GFD to identify the different eras in financial markets. These eras are the Dutch East India Co. (1602-1689), the Glorious Revolution (1689-1720), Mercantilism (1720-1792), the Napoleonic Wars (1792-1815), the Transportation Revolution (1815-1848), Free Trade (1848-1873), the Gold Standard (1873-1914), the World War (1914-1945), Keynesianism (1945-1981) and Globalization (1981-2022). We are probably entering into a new era of higher interest rates, a reduction in global trade and inflation that differs from the period of Globalization in which interest rates consistently declined, inflation remained low and global trade was promoted.
Only with GFD’s long-term global indices can investors truly understand the performance of stocks, bonds and bills globally during the past and into the future.
