The Big Question: Diversify or not to Diversify? – Geographic Revenue Exposure

For decades the world has been moving towards a more and more liberated global economy. However, now we are witnessing a revival of protectionism foremost brought about by the uncertainties around Brexit negotiations and Trump’s protectionist policies. In Jun 2016, Britain voted to leave the European Union amid rising Euroscepticism. In the United States, Trump announced a series of tariffs on imports since he came into office in Jan 2017; other nations are following suit.

The question now is whether protectionism becomes the new norm or if it’s just a momentary episode.

Given this market situation, the prominent concern that market participants often have is whether they should diversify the economic exposure risk of their portfolios to combat rising protectionism. In this paper, we attempt to study the historical impact of global revenue exposure by dissecting the benchmark into diversified and concentrated portfolios by geographic revenue, and we present the study on European and United States equities.

Highlights in this White Paper:

  • We constructed two portfolios. The first consisted of companies with relatively high diversified geographic revenue exposure and the second consisted of the companies with relatively more concentrated exposure.
  • To minimize sector bias, both the portfolios were created by taking companies from each sector until we covered 20% market capitalization of each business segment.
  • The diversified portfolios had more international revenue exposure while the concentrated portfolios maintained a higher domestic exposure.
  • Major world events such as Brexit negotiations and Trump’s protectionist policies produced a significant divergence in the performance of the two portfolios.

To read the full white paper, please click on the link below.