In two recent posts, I have discussed how disparities in market composition affect global market valuations, and also what role investors should expect emerging market equities to play in their portfolios. To continue along those themes, I think it is important to discuss the impact on the migrations of intellectuals and entrepreneurs on global markets.
A very good example of this is a comparison of Russia and Israel. After the collapse of the Soviet Union made emigration easier, there was a huge migration of Russian Jews to Israel in what came to be called the aliyah. One recent study estimated that some 15% Israel’s population is composed of Russian immigrants. The influx of Jewish Russian intellectuals, scientists, and entrepreneurs transformed Israel’s economy. Technology startups boomed, and now the technology sector composes almost one-third of the MSCI Israel Index:
By comparison, the Russian market (as measured by the MSCI Russia Index) these Jewish entrepreneurs left behind is now primarily composed of immobile industries such as energy and banks that derive their profits either from static resources, or from static populations:
Needless to say, the technology-heavy Israeli market trades at a handsome premium to the resource-focused Russian market:
The takeaway here is that markets are dynamic in that they are constantly changing. Russia is a much older market than Israel, having once composed around 6% of global stock market capitalization. But even 25 years after the fall of communism, the continuation of authoritarian rule and economic neglect led to a loss of its intelligentsia, and the Russian market in its entirety is barely more valuable than Apple.
By contrast, Israel was nonexistent up until 1948. However, because it absorbed a huge amount of entrepreneurial immigrants with technological know-how, – not to mention its strong institutions and rule of law – its high-tech industries grew rapidly, and Israel is now considered a ‘developed market’ alongside the well-established markets of Europe and North America.
We should remind ourselves that the wealth of the future is derived from innovation and ideas, as Morgan Housel has written. With the opening up of borders, populations are no longer tethered to their homelands, and capital will inevitably accompany the future generations of innovators to their chosen destinations. As long as emerging market nations like Russia suffer from weak institutions, inflation, and a lack of respect for the rule of law, their best and brightest will continue, at first opportunity, to leave for more welcoming destinations, such as Israel, or the United States. The implications of this trend are many, as the developed world markets are likely to continue to transform into more knowledge-centric industries such as healthcare and technology, while the rest of the world markets will be left with the industries of yesterday.
