The common wisdom is, to just by MSCI World and chill. That strategy would have returned on average 7.64% pa. But if you look at the performance of the last 30 years, if you would have bought S&P 500 instead, you would have returned 10.57% pa on average. While that does not sound a lot, if you would have started with a $1000, your portfolio would be worth now $21595 instead of $9498.

Quite a big difference.

US vs Europe & East Asia

If we take the developed economies, the US’s market share has been steadily increasing in the last 40 year.

Past performance does not indicate future one, but I predict this divergence will continue. There are structural factors that explain the relative underperformance.

Demographics

I belief this to be the biggest factor in long term growth.

• The US had and still has a moderately higher birth rate compared to Europe. All birth rates of developed asian countries as well as China’s are collapsing. Less people, less demand as well as lower production capabilities.
• The US is still the number one spot to immigrate to. If it wanted, it could easily double or triple the amount of high skilled labor coming from all over the world. Many european entrepreneurs move to the US, instead of founding a new company in their home country. It’s not easy for other countries to replicate this. English is already the lingua franca and the US being a proposition nation, makes it easy to integrate.

Easy of doing business

• It is incredibly hard to found a new company in most european countries: No single market, higher taxes, lower VC funding and more regulation. None of the biggest companies in Europe has been founded in the last 30 years.
• Japan is famous for it’s difficulties to acquire funding, it’s old banking sector, strict labor laws and in general bureaucracy.
• China’s economy is still heavily managed top down. So no company will make it unless the CCP says so. It is also heavily subsidizing exports to continue to fuel Chinas’s growth, as domestic consumption is politically unwanted. Also, how secure are your property rights there?

I don’t predict that those things are changing any time soon, as they are often an integral part of the country’s culture & polity. Europe cannot really slash their taxes without giving up the welfare state.

Households investment

• Historically, the US is one of the countries with the highest stock ownership. Furthermore, a lost of pensions are based on investing the money set aside.
• Europe (on average) and Japan hold more cash and invest a bigger portion in real estate.
• European pensions are mostly based in the on payments of the current workforce and are never invested!

Investing cash in productive assets like public or pre-public companies, either directly by the households or by pension funds, allows more long term growth: The capital is efficiently allocated and reinvested, instead of given to secure, but ultimately low return loans. Here as well, I don’t see the frugal Germans jumping into the stock market, which is often equated with gambling. Those cultural factors are hard to change and will take time to change.

What about emerging markets?

Emerging markets have underperformed the US in the last 30 years as well. Here the comparison is even worse, you would have only returned 5.06% pa. We’ll look into the causes in a future post.