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Old 10-05-2019, 06:39 PM   #1214
Join Date: Apr 2005
Posts: 104

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.
Thanks for discussion. As I'm not trained in economy, this is the knowledge gap that I want to verify with you and all the experts here. According to what I've read about GNP/GNI, it's different from GDP:

Economics help: "GNP and GDP both reflect the national output and income of an economy. The main difference is that GNP (Gross National Product) takes into account net income receipts from abroad."

Kimberly Amadeo (the balance) on U.S. GNP: "U.S. GNP says a lot about the financial well being of Americans and U.S.-based multi-national corporations. It says less about the health of the U.S. economy. For that, you should use gross domestic product (whether real or nominal). GDP measures production inside of a country, no matter who makes it."

If the above definition and explanations are correct, U.S. GNP captures all the businesses Google, Alphabet, McDonald's around the globe by virtue of them being U.S. firms. By the same token, their revenues will not be included in the GNP of say China. I believe that your concern only applies to GDP but not to GNP/GNI.

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.
There are two separate questions here: (i) whether the stock listing in a particular market can be mirrored by an easily measurable economic indicator specific to that market, and (ii) whether we should allocate investment based on consensus of prospect (market valuation) or actual economic output represented by the basket of companies in the ETFs?

For (i), I understand that GDP isn’t a suitable indicator for the reasons mentioned earlier by you. However, taking U.S. stock market as an example, if GNI takes into account the total output of U.S. incorporated companies regardless of the geographical locations from which their revenues are derived, then a U.S. centric index (after normalizing for its valuation) should reflect U.S. GNI.

But how about the best and most promising companies from Philippines that happened to be listed in U.S. stock market? While I have no knowledge about Filipino companies, the top 3 tech companies of China: Baidu, Alibaba and Tencent happen to be listed in Nasdaq, NYSE and HKSE, respectively. You would think that the economic potential of these companies is captured by IWDA? No, they are included in EIMI by means of ADR shares. Similarly, the mega oil company PJSC Lukoil is listed in LSE, but it's also included in EIMI and not IWDA! So, it seems quite apparent that in building IWDA/EIMI ETFs, the fund managers are not following the listing market blindly.

As for (ii), I couldn't really see the logic of encouraging investment allocation based on market capitalisation but denying the allocation based on GNP. I think they are both viable methods but each has its own flaws. They can complement each other though! The market consensus of prospect are wrong many times in the history (or we won't have market crash). Would you want to allocated your global investment proportionately when the market capitalisation of Bitcoins went up to $300 billions? or adhere to the market cap ratio of tech companies during bubble? or have huge allocation to Nikkei market in the 1980s when it accounts for >40% of global market cap?

Since the purpose of index investment is for long term, we should also realise that the principle that always holds in long term is regression to the norm. The norm would be the true economic output of the market, net of euphoria and depression... that is exactly what market capitalisation isn't telling us.

If there's an indicator that is better than GNP/GNI, I would love to learn more about it, but it's certainly not market capitalisation.
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