Why International Diversification Matters Today (Part 5 of 6)
US’s declining share of world GDP.
While the U.S. is still arguably the world’s most dominant economy, its relative share of the global economy is shrinking. Thirty years ago the United States accounted for roughly one-third of global output. Today the number is closer to 20%. Depending on the exact methodology, China is now the world’s largest economy or soon will be. While China’s rate of growth is slowing, China along with India, Indonesia and many other emerging markets may continue to outgrow the United States and other industrialized countries for the foreseeable future. This suggests that owning a predominately U.S. portfolio underweights the potential dominant and fastest growing portion of the global economy.
Market Realist –
The US’s contribution to the world’s growth is declining.
The pie chart above shows the estimated contribution of some major economies to global GDP (gross domestic product) over 2014–2015.
The United States (VOO) is still the biggest economy in the world and makes up ~22% of the world’s GDP. However, the US’s declining share of world GDP is clear. Its contribution to global economic growth is less than that of China (FXI).
China’s growth is making up ~40% of the global growth, whereas the United States is currently contributing ~34% of global growth. While China’s growth rate is declining, it’s still growing much faster than other major economies (EFA). Given the size of China’s economy and its current growth rate, it’s no wonder that China’s growth rate makes up ~40% of the world’s economy.
Meanwhile, India’s (EPI) growth currently accounts for ~13% of global growth. Given its population, its youthful nature, and the fact that the Indian economy is demand-driven, India’s growth could soon account for a larger portion of the world’s growth.
So you should consider underweighting US stocks in your portfolio and tilting your portfolio toward international stocks (ACWI).
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