European Stock Markets Bigger than USA’s, Sort of

The Financial Times reported yesterday that the value of stocks on European stock exchanges is actually greater than that on US stock exchanges. This is a great example of how numbers in economics and finance actually don’t mean what they appear to mean. As the old saw has it, “Figures can lie and liars can figure.” To its credit, the FT said much the same thing.

First, the raw numbers. According to Thompson Financial Data, Europe’s 24 stock markets, including Russia and emerging Europe, have a combined value of US$15.72 trillion (€11.819 trillion) at the end of last week. That exceeded the $15.64 trillion market value of the US, and it is the first time that has happened since World War I. Fair enough, one number is, indeed, bigger than the other.

Second, though, comes a bit of an analysis. Since Russia and Turkey make up 2 of the 24 European bourses considered, one may say that Europe extends from Portugal to Kamchatka and the Sea of Japan, to say nothing of Anatolia. Indeed, it’s fair to say Europe’s stock markets are only bigger if one throws in some stocks that trade in what is technically Asia. Perhaps for balance, the US should include Canadian shares.

Following on that are the exchange rates. Because the European stocks are valued in euro, pounds, rubles and kroner, that €11.819 trillion figure is less than firm. Converting it to US dollars is a further complication since the US unit is off against the euro (and has been for quite some time). Using market rates, one gets X but if one used purchasing power parity one may well get Y.

The FT does make one valid point. “For decades, through boom and bust, US companies were more focused on shareholder value, and delivered far higher returns on equity than their European counterparts. Restructuring has turned that round. According to Absolute Strategy Research, European companies managed a return on equity last month of 17.5 per cent, compared to 16.5 per cent for the US.” After all, investors don’t care about the size of the market overall so much as they do about return on their particular investment. While all these statistics are true, only some figures are relevant.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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