Market Capitalization vs. "Economic Footprint"

Yesterday's blog entry on the larger weighting in the future for Chinese stocks points out one example of the disconnect between country weightings in the major indices and what I call the "economic footprint" of countries: their weight in the world economy.

China is the most extreme example of the disconnect between the capitalization weighting and economic footprint but there are others. Since the capital markets of emerging market countries are less developed the number of their companies that are publicly held and thus included in equity indices is small.

Here is an example here are the weights in the MSCI all world capitalization index

And here is the list of countries based on % of world GDP

United States	22.4%
China	12.3%
Japan	6.6%
Germany	5.0%
France	3.7%
United Kingdom	3.6%
Brazil	3.0%
Italy	2.9%
Russian Federation	2.8%
India	2.5%
Canada	2.4%
Australia	2.1%
Spain	1.9%
Korea, Rep.	1.7%
Mexico	1.7%

And here is one estimate of what the world economy will look like in 2030

Looking at these numbers one would not be surprised in the future to see a growing share of the worlds market capitalization coming from China and India and other emerging markets and less for the developed markets of Europe as the world stock market weightings more closely match the "economic footprint" of countries.

I came across this chart which although a bit difficult to follow at first gives a very interesting perspective on past and possible future