What The Suez Canal Incident Can Teach Us
Diversification and globalisation are the keys to the future
On 23 March 2021, the Ever Given — one of the world’s largest container ships ran aground on the banks of the Suez Canal after it was caught in a sandstorm. The ship ended up blocking the critical waterway for global trade for five days before it was finally freed on March 29. During that period, canal authorities estimated that 320 other vessels awaited access to the canal. The cascading impact of the blockage of a single waterway on global trade was tremendous — billions of dollars’ worth of cargo were stranded on the idle ships, while Egypt lost an estimated $15 million daily in toll revenue. The blockage also triggered a broad decrease in capacity for trade and oil shipments.
MarineTraffic, a global ship tracking company offers viewers a live snapshot of cargo ships and tankers pictured below. You might not have been able to imagine just how bustling the ocean superhighways are and what they mean for the flow of goods and supplies between countries.
Sometimes we tend to forget that the many companies we may invest in have a global customer base, like Milo, the drink is something that we are all familiar with, either as “milo siu dai” or “milo dinosaur” from our favourite local coffeeshop. Nestlé, its manufacturer sells the chocolate malt drink in a diverse range of territories, including Malaysia, Brunei, Pakistan, Philippines, Vietnam, Indonesia, Hong Kong, Sri Lanka, Maldives, Thailand, Jamaica, Southern Africa, Central Africa, East Africa, West Africa, Australia, Colombia and New Zealand.
When looking at companies' equity portfolios, it is common to assess their exposure based on the geography of where these companies are domiciled. We take this a step further — working with evidence-based investing managers who have access to highly comprehensive data, we can assess exposure not only by domicile geography, but also based on where these firms generate their revenues, offering insight about the degree to which some of these markets are integrated.
For example, the S&P 500 is the most well-known benchmark of US companies — whilst investors may buy the index ostensibly for exposure to the US market, data from Morningstar shows that these companies only generate around 60% of their revenues in the U.S., with nearly 40 cents of every dollar earned coming from other parts of the world. A snapshot of well known diversified indices and where these companies’ revenues are generated is shown below.
Looking at the data, we can arrive at two conjectures:
The larger the company, the more global it is in nature - where it can derive a lot of profit from outside of its home country.
For companies which are smaller, the majority of where they make their money is from country of their domicile.
When looking at companies from a globally diversified equity allocation that incorporates known drivers of expected returns, we can see that the main difference between value and growth stock indices in the U.S. was that value indices had higher levels of domestic revenue exposure in both large and small companies.
When designing a globally diversified equity allocation in your portfolio, you would want to expose your investments to academically proven drivers of return.
As the recent shipping accident has shown us, the world is more tightly knit and globalised than you may think. As such, we have to ensure that our investments are not only diversified across the countries, but also diversified in a manner which exposes the investments to proven drivers of returns in a way that captures all the returns that the world has to offer.
Amidst the constant debate accessing what the world has to offer and investing outside of our home bias (and comfort zone), the wisdom of designing and maintaining long-term diversified allocations that help investors maximise the output of their money is a value that will never depreciate.
