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02/09/2016

Where in the world is that revenue coming from?

Our clients often ask about their equity exposures, such as how much company revenue is coming from emerging markets, or how much is earned domestically versus via foreign markets. While perfectly reasonable questions, it’s surprisingly difficult to get the data necessary for an answer.

Anyone who has ever trawled through company reports will know there is no common standard for firms to break down and classify revenues. Investors are often left with the challenge of reconciling one company’s taxonomy with those adopted by others.

The resulting uncertainty is a key reason behind the dearth of analysis on the subject. Fortunately, financial data providers are getting better at classifying the information within company reports, allowing us to get a rough idea of what the aggregate numbers look like.

Developed versus emerging markets

Figure 1 is a breakdown of revenues by whether they are generated in developed, emerging, or frontier markets. Data is shown for the world equity market as a whole and then for each of the 10 largest markets by capitalisation (listed alphabetically).

Globally, roughly 66% of revenues come from developed markets. For individual developed markets, the number tends to be a bit higher still: 76% for the UK, 86% for the US and 89% for Canada. Yet all still provide a significant exposure to emerging markets. Of these ten, Hong Kong is the obvious outlier, primarily due to the substantial 79% of revenues generated in mainland China (still classified as an emerging market).

Domestic versus foreign revenues

Figure 2 is a breakdown of revenues, generated domestically and elsewhere. For this analysis, the problems of data quality are more visible (note the large attribution to “Unspecified”), but there are still some clear differences across markets.

The US, Australia and Japan have relatively high proportions of “Domestic” revenue. For European markets, by contrast, it tends to be lower due to the high degree of trading between themselves. For the UK, domestic revenues represent 36% of the total. However, a look at the large-caps of the FTSE 100 versus the mid-caps of the FTSE 250 confirms a substantial difference. The large-caps generate around 28% domestically versus 52% for the mid-caps. (The divergence in performance in the weeks following the Brexit vote is perhaps then no surprise.) Again, Hong Kong stands out, serving more as the financial gateway to mainland China.

Some conclusions

We might conclude that making investment decisions based on source countries of revenue is futile: the data leaves a high degree of uncertainty, and can vary greatly between larger and smaller-cap companies.

We could also conclude that the conventional distinction between “developed” and “emerging” markets is increasingly irrelevant: Hong Kong, typically classed as developed, derives most of its revenue from mainland China, and other developed markets generate significant revenues from emerging markets. (Yes, this is just as we might have expected, but the actual figures put the issue into stark relief.)

Perhaps the only clear conclusion is that equity markets are now so global by nature that grouping companies by their market of listing is increasingly inappropriate.

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