You hear a lot these days about how globalization is reversing. While some supply chains are onshoring and trade ties weakening, these trends are not reflected in public companies’ revenue sources. In fact, our annual study of Morningstar’s 48 single-country equity indexes shows growing interconnectedness between markets. This runs counter to the narrative that the pandemic and geopolitical tensions have undermined globalization.
As Morningstar senior analyst Gregg Wolper recently wrote, revenue exposure is “a different way” to assess “risk and opportunity.” Globalized revenue sources are important for investors and advisors to consider when constructing portfolios. When we aggregated corporate revenues for the constituents of Morningstar Global Markets Indexes, we found:
• Just 16 of 48 markets became more domestic in their revenue sources compared with last year. The Morningstar US Market Index, Morningstar Japan Index, and Morningstar China Index all increased their share of international revenues compared with last year.
• Many national equity markets are not very national. Western European markets are the world’s most globally connected.
• Emerging markets, especially in Asia and Eastern Europe, are the most domestic in their revenue sources. Tech-heavy Taiwan and Korea stand out as exceptions.
• Revenue sources help explain why correlations between developed markets have risen, while emerging markets tend to be less correlated with developed markets.
• Sector-level dynamics help explain market-level revenue trends. Technology companies tend to be more global, while the financial-services sector is generally more domestic.
Which Sectors Are the Most Global?
According to Morningstar’s company-level Global Geographic Segment data, technology companies tend to be most global in their revenues, whereas sectors like financial services and utilities are largely domestic. This trend holds across sectors in the US, Europe, and Asia-Pacific when revenue sources are examined for Morningstar’s range of equity sector indexes. Data in the table below is as of May 31, 2024.
Sector dynamics help explain some of the regional trends. The Morningstar US Market Index had a 25% technology weight in 2021; by mid-2024, technology companies represented 31% of the index’s weight. Nvidia NVDA, the semiconductor maker, grew to 5.7% of the Morningstar US Market Index as of mid-2024, up from 1.2% in mid-2021. According to PitchBook data, Nvidia actually sources a larger share of its revenue from the US today than it once did, though the majority of the semiconductor maker’s revenues still come from outside the US. As Nvidia’s share of the equity market has grown, it has pushed down the index’s domestic revenues.
Across the globe, technology companies contribute to international revenues. This is true of Japan’s Tokyo Electron, ASML ASML of the Netherlands, Germany’s SAP SAP, Taiwan Semiconductor 2330, Korea’s Samsung Electronics 005930 and Canada’s Shopify SHOP. The technology sector has generally performed well. As tech’s share of many country indexes’ market capitalization has increased, it has contributed to higher international revenues.
India is an exception to this trend. The technology sector’s weight in the Morningstar India Index has fallen from more than 16% in 2021 to 10% today. India’s IT outsourcing companies like Infosys INFY and Wipro WIT have been laggards, whereas more domestically oriented companies such as Reliance Industries RLNIY and Bharti Airtel have been far stronger performers. As a result, India’s domestic revenue share has increased. Today, 75% of the revenues of the Morningstar India Index come from India. In 2021, the figure was 69%.
Sector dynamics help explain the domestic orientation of many emerging markets. The Morningstar Egypt Index, which has the highest percentage of domestic revenues of all 48 country indexes, is dominated by a bank. The domestic-trending financial-services sector represents more than one third of market capitalization in Peru, Kuwait, Qatar, Indonesia, Colombia, South Africa, the Czech Republic, and Saudi Arabia, which are all fairly domestic markets.
Globalizing Revenue Sources Helps Explain Correlation Trends
It stands to reason that markets comprising companies with interconnected revenues are likelier to move in the same direction. Consider the three largest constituents of the Morningstar Developed Markets ex-US Index: Novo Nordisk NOVO B, the Danish pharmaceutical business specializing in diabetes and weight loss therapies; ASML, a Netherlands-based company whose equipment enables semiconductor manufacturing; and Toyota Motor 7203. Novo Nordisk earned 55% of its revenues from the US in 2023. ASML sourced 80% of its revenues from Asia last year. Toyota earned nearly 40% of its revenues from North America, 17% from Asia outside of Japan, and 12% from Europe in the fiscal year ended March 31, 2024. The fortunes of Novo Nordisk, ASML, and Toyota Motor rest less on Denmark, the Netherlands, and Japan and more on global dynamics.
Indeed, increasingly globalized revenue sources parallel rising correlations across developed equity markets. According to the Morningstar 2024 Diversification Landscape report, correlations between global markets have climbed, especially across developed markets. Markets like the US, Europe, and Japan are more correlated with each other than emerging markets are tied to developed markets. The authors write:
“From a diversification perspective, most international stock benchmarks, especially those in developed markets, have been closely tied to the US market over the past three years … Developed-markets equities, especially European stocks, have had the tightest correlation with US equities. Meanwhile, emerging-markets stocks have tended to have lower correlations with US stocks, and those correlations have generally trended down since 2000.”
Portfolio Implications for Investors
As geopolitical risk is top of mind for many investors, revenue sources are important to consider. A domestically oriented market may be less exposed to conflict or trade tensions than an international one. Meanwhile, domestic election results could have more of an impact on companies that derive their revenues close to home.
From the perspective of asset allocation, globalized revenue sources blur the lines between the home market and international portions of a portfolio. While it’s true that global exposure can often come through domestic companies, it’s also true that leading players in an investor’s home market may be based offshore. As always, a global equity portfolio offers the broadest opportunity set.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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