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Old 10-05-2019, 07:54 AM   #1209
BBCWatcher
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Correct me if I'm wrong, by the definition of GNI/GNP, GNI of U.S should at least capture most of the economic output of Google across the world (even if it's not 100%) as a U.S. firm right?
No.

A GNP, GNI, or GDP weight would take the size of the U.S. economy relative to the rest of the world and apply it to the stock markets (and their listings) that happen to be located in the United States. Which...makes no sense. The companies listed in stock markets that happen to be located in the United States don’t conduct business only in the United States. Far from it.

While it is a herculean task to calculate the regional revenue breakdown of all the companies in IWDA/EIMI, I trust the GNI data published by the world bank as the simplest and most reliable source for the approximation of country-specific economic output.
Great. So what’s that got to do with Alphabet? McDonald’s? Samsung?

It is a Herculean task to tweak the weights of each individual stock — hundreds or thousands of them — using some measure of national incomes or products (maybe even purchasing power adjusted — all sorts of choices available here) — but that’s exactly what you’d have to do in order for any such tweak to make economic and financial sense. Weighting onto the stock market location makes no sense....

....Or you can just go with a global stock index that already exists, because it’s at least pretty good. And pretty good is plenty good enough in this business.

The problem with market capitalisation method is that not all countries are in the same phase of market cycle. Unless there is some sort of correction to their valuation, I don't see market capitalisation reflects the real underlying businesses, but rather a mix of true business output and the maniac nature of human psyche lol. For example, IWDA has a PE and PB ratios that are around 1.5x higher than EIMI. Too bad I've no access to their historical data to tell where their valuations stand as of today... but that's sufficient to show that market capitalisation is not superior to national weight. It's not surprising that there might be spillover of EM output into IWDA with GNI data that's not corrected, but neither is market cap corrected for valuation.
Why?

You’re implicitly thinking that EIMI represents the economic potential of the national economies of “emerging” countries. No, it doesn’t — not well at all, anyway. It represents the market consensus of the prospects (valuations) of the stocks that happen to be listed and traded in minor stock markets located in “emerging” countries. Those are two very different concepts and constructions. The economies — some of them, anyway — could have fabulous prospects (only that; they’re not realized yet) for growth. The stock markets that happen to be located in those economies? Probably not at all — they’re probably shrinking, actually. Unless you’re predicting that whatever stock market exists in (random example) Manila is suddenly going to start attracting the best and most promising new companies that want to raise capital, and investors from around the world interested in supplying that new capital? No, that’s very, very unlikely. The best and most promising companies doing substantial business in the Philippines are raising capital by listing where the investors are: typically in New York, London, or Hong Kong.
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