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International stocks: Developed markets

Explore the role of international stocks in portfolio diversification.

CIBC Investor’s Edge Mar. 09, 2024 5-minute read

Some investors stay close to home in Canada and the United States, while others "pack their passports" and invest in Europe and Asia-Pacific. In this article, we provide an overview of international stocks and their role in portfolio diversification.

The world in stocks

We define international stocks as the developed markets of Europe, Australasia and the Far East (EAFE). To provide context for international stocks, we show major regions and the top 10 markets, by their share of world stock market capitalization.¹

Share of world stock market capitalization by region

Region	Share of world stock market capitalization
North America	64.4%
Asia-Pacific	15.5%
Europe	10.4%
Emerging	9.5%
Other	0.2%

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Table

Share of world stock market capitalization by market

Market	Share of world stock market capitalization
US	61.7%
Japan	6.3%
UK	3.7%
Canada	2.8%
France	2.6%
China	2.5%
Switzerland	2.2%
India	2.1%
Australia	1.9%
Germany	1.9%

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Table

The US stock market is by far the largest, with 61.7% of world stock market capitalization. Canada, with 2.8% of world stock market capitalization, is the fourth largest stock market, bigger than that of China, India or Germany. EAFE’s share of world stock market capitalization is about 26%, mostly comprised of developed markets in Asia-Pacific — 15.5%, and Europe — 10.4%.

With this context, we now offer some historical perspective on global stock markets, including risk, return and other considerations.

Global stock markets: Return

In the following table, we show annualized returns by decade and for the overall period from 1980 to 2023, for various allocations to Canada, US and EAFE.²

Annualized sub-period returns, 1980 to 2023

Allocation	1980s	1990s	2000s	2010s	2020s	Overall
Canada	12.2%	10.5%	5.6%	6.9%	8.6%	8.8%
US	17.5%	20.9%	−4.0%	16.0%	12.6%	12.2%
EAFE	22.7%	9.7%	−1.6%	8.3%	5.9%	9.1%
Canada and US	14.9%	16.0%	1.0%	11.6%	10.7%	10.7%
Canada and EAFE	17.8%	10.3%	2.1%	7.8%	7.3%	9.2%
US and EAFE	20.4%	15.6%	−2.7%	12.2%	9.3%	10.9%
Canada, US and EAFE	17.8%	14.1%	0.1%	10.6%	9.1%	10.3%

This provides some perspective on the long-term performance of allocations to single markets — Canada, US and EAFE — versus allocations to pairs of these markets or to all 3 markets. No single market was consistently the best or the worst. Some markets underperformed others by a wide margin for decade-long periods, including Canada in the 1980s and the United States in the 2000s.

Global stock markets: Risk

EAFE stocks have different sector, currency, economic and country exposures than North American stocks. We explore how this diversification affected downside risk.

Here are the annual returns of Canada, US and EAFE in market crashes since the turn of the century.³

Annual returns in market crashes

Year	Canada	US	EAFE
2000 — Tech crash	7.4%	−5.6%	−10.6%
2001 — Tech crash	−12.6%	−6.4%	−16.3%
2002 — Tech crash	−12.4%	−22.8%	−16.5%
2008 — Financial crash	−33.0%	−22.6%	−30.0%
2022 — Tech crash	−5.8%	−12.5%	−8.1%

The tech crash of 2000 to 2002 shows some of the risk of international stocks. EAFE’s weight in the technology sector was much lower than that of the United States, then as now, but the crash was more severe in EAFE than in other markets. Yet in the tech crash of 2022, EAFE was less affected than the United States. This shows that sector exposure, although important, is only one of the factors that can affect downside risk.

Here are the current sector weights of global stock markets, as of February 2024.⁴

Sector weights of global markets

Sector	Canada	US	EAFE
Financials	31.1%	12.9%	18.8%
Energy	17.3%	3.7%	4.1%
Industrials	14.5%	8.6%	16.6%
Materials	9.8%	2.3%	7.1%
Information technology	8.8%	29.6%	9.3%
Consumer staples	4.4%	6.0%	8.9%
Utilities	3.8%	2.1%	3.1%
Communication	3.6%	9.0%	4.1%
Consumer discretionary	3.6%	10.5%	12.4%
Real estate	2.4%	2.3%	2.3%
Health care	0.3%	12.7%	12.8%

Relatively large sector weights include a weight of over 30% in financials for Canada and a weight of almost 30% in technology for the United States.

Key takeaways

Canada makes up less than 3% of world stock market capitalization or is the fourth largest stock market in the world, depending on how investors want to think about Canada's role in the global stock market.
Returns have varied considerably across global stock markets, with no market consistently being the best or the worst.
Risks have varied considerably across global stock markets, affected by their different sector, currency, economic and country exposures.

¹ Stock market weights based on portfolio composition of Vanguard total world stock ETF (VT). Source: Vanguard US. Data as of January 31, 2024.

² Index total returns including dividends for Canada (S&P TSX Composite), United States (S&P 500) and EAFE (MSCI EAFE). Returns in Canadian dollars, based on full currency exposure to foreign stocks. Allocations to more than one market are equally weighted. Decade of 2020s based on period from 2020 to 2023. Source: Norman Rothery, asset mixer.

³ Index total returns including dividends for Canada (S&P TSX Composite), United States (S&P 500) and EAFE (MSCI EAFE). Returns in Canadian dollars, based on full currency exposure to foreign stocks. Source: Norman Rothery, asset mixer.

⁴ Sector weights based on portfolio composition of the following ETFs: Canadian stocks, S&P TSX Composite (XIC); US stocks, S&P 500 (IVV); EAFE stocks, MSCI EAFE (EFA). Source: iShares Canada and iShares US. Data as of February 22, 2024.

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