When it comes to global equity returns, the financial sector matters for one simple reason: financial stocks dominate global stock exchanges. Looking at the MSCI All Country World Index, which includes the 23 developed countries in the MSCI World Index and the 23 emerging countries in the MSCI Emerging Markets Index, nearly 23% of all stocks are financial stocks (552 stocks out of a total of 2449 stocks). Financials account for 7.5% more of the index than the second largest sector (industrials) and 8.5% more of the index than the third largest sector (consumer discretionary). There are more financial stocks than there are energy, health care, utility and telecom stocks combined. Surprisingly, financials almost equally dominate developed market indices as they do emerging market indices. 21.2% of all developed market stocks are financial stocks and 25.1% of all emerging market stocks are financial stocks. Out of the 46 country indices, just about two-thirds have more (or equal) financial stocks than any other sector. If you are are on the lookout for MSCI Country indices where financials aren’t the dominate player, then look here (in alphabetical order): Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Peru, Russia, Sweden, and Taiwan.
With all of this in mind, the chart below is even more remarkable, The MSCI All Country World Index has increased by 52% over the past five years. During this time, the financial sector has underperformed by over 17%.