At DWS we undertook this analysis, and the result in some areas was unexpected. Although it should be noted that the macroeconomic perspective we have in mind when looking at global trade needs to be complemented with the micro-economic perspective of the actual companies composing the equity indices ETFs are invested in.
Mechanically, when global trade tensions arise, indices with highly domestic stocks from a revenue standpoint (i.e. companies that generate cash more from activities not based on exporting) may prove more resilient than their counterparts with more trade-dependent stocks.
Let’s first focus on global revenues.
If the trade war spreads globally, repercussions on global trade and growth could be severe for countries with an export-driven economy.
Europe, and especially Germany, is exposed since, in these economies, domestic revenue exposure is relatively low.
US equity indices, however, track companies that tend to have relatively high domestic revenue exposure.
And in the case of Japan, while the stocks within the MSCI Japan index are more trade dependent than their US counterparts, domestic revenue exposure is higher than that of European stocks, so domestic revenue generation is relatively strong and the economy is less trade dependent.
The following graphic illustrates this:
Source: DWS, Factset, December 2018
As we can see from observing the MSCI USA index, which tracks the performance of the large and mid-cap segments of the US equity market comprising 621 stocks (Source: MSCI, November 2018), around 63 per cent of the revenue generated by companies in the index comes from the domestic US market, with only 6 per cent of those revenues stemming from China.
Compare this with the MSCI Europe index, which provides exposure to 442 large and mid-cap companies across 15 developed market European countries (Source: MSCI, November 2018), where only 35 per cent of the revenues generated by companies are domestic – and with 6 per cent exposed to China and 20 per cent to the US.
Meanwhile, in the case of the DAX 30 index (Germany’s main stock market index) only 15 per cent of corporate revenue is inter-Germany linked – which is no surprise given Germany’s export-driven economy.
In the case of both the MSCI Europe and DAX 30, trade as a share of GDP for the underlying countries is over 80 per cent (Source: OECD/World Bank based on full year 2016).
Now let’s look specifically at China, keeping in mind that ETFs providing exposure to the domestic Chinese equity market can be bought and sold on the London Stock Exchange (LSE) just as easily as ETFs providing exposure to UK, German, European, US or global equity indices.