How the Western Equity Markets Will Benefit From Chinese Growth

After the slowdown we had in the western economy, China has become the key economic engine for the global growth. Most of the time US equity markets look out for the Chinese market for its direction hoping that a continued growth in China will help the US companies. In my view Chinese economy has little to do with how the US companies will do in the short term. In my view structural changes taking place in China will help the US and European companies in the long run as these companies are better prepared to benefit from these changes.

Short term: It is US economic recovery that will drive the market, not the emerging market recovery

By looking at the most recent full year numbers available for S&P500 companies, it is clear that more than half of the revenue for US companies is generated within the US itself. Interestingly the numbers suggest that the significance of the US market increased over the last 3 years. So for the earnings growth of the US companies what matters are the developments taking place in the home market, not in the emerging markets.

Table 1: Geographical breakdown of revenue

2007

2008

2009

US

55%

56%

59%

EU

10%

12%

10%

UK

2%

1%

1%

Other

33%

31%

31%

100%

100%

100%

Source: Bloomberg

(Click charts to enlarge)

Chart 1: The significance of US market for the US companies


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