Data Update 4 for 2026: A Tumultuous Year (2025) for Global Markets!

Why It Matters

The shift away from U.S. dominance and the nuanced view of country risk signal that investors must broaden diversification and use real‑time market signals, like CDS spreads, to manage exposure in an increasingly fragmented global economy.

Key Takeaways

• Global equities delivered modest gains despite currency fluctuations in 2025.
• US market share fell from ~50% to 38% of global cap.
• International diversification returns narrowed but still advisable for investors.
• Country risk hinges on politics, violence, corruption, and legal enforcement.
• Sovereign ratings lag markets; CDS spreads provide timely risk insights.

Summary

The fourth data update for 2026 examines how global equity markets performed in 2025, converting local‑currency returns into U.S. dollar terms and pairing that analysis with a snapshot of country‑risk metrics, sovereign ratings, and currency movements at the start of 2026. The review highlights that, despite a generally positive year for equities worldwide, the United States’ share of global market capitalisation slipped from roughly half to 38%, while Europe and China outperformed their weightings. India emerged as the poorest performer, delivering only about 8% in local terms and a me‑ager 3.3% when expressed in dollars due to rupee depreciation. Key data points include the divergence between local‑currency and dollar‑based returns—many European markets posted higher dollar gains thanks to currency strength—and the fact that the S&P 500’s implied equity risk stood at an 8.41% internal rate of return. The video also notes the historic downgrade of the United States from AAA to AA1 by Moody’s, underscoring the rarity of rating changes in 2025, and contrasts sovereign rating lag with more responsive sovereign CDS spreads, especially for countries like Argentina and Venezuela. The presenter stresses four pillars of country risk—political structure, exposure to violence, corruption, and legal‑system robustness—and illustrates how these factors shape a nation’s risk profile across its developmental lifecycle. He likens young economies to high‑growth, high‑volatility firms, mature economies to stable but slower‑growing entities, and warns that aging economies face declining growth as core industries and demographics wane. For investors, the analysis suggests that while international diversification’s premium has narrowed, it remains a prudent hedge against domestic‑only exposure, especially as the global market‑cap landscape rebalances. Monitoring sovereign CDS spreads alongside traditional ratings can provide a more timely gauge of default risk, informing both equity and fixed‑income allocation decisions as the world moves further from a US‑centric paradigm.

Original Description

In 2025, the global backlash that has already upended politics in much of the world came for markets, and in this session, I start with a look at global equity market performance in 2025, before moving on to create a snapshot of country risk at the start of 2026. After a brief discussion of the factors that cause country risk to vary across countries, I look at country risk measures of default risk (sovereign ratings and sovereign CDS spreads) before moving into "my" assessment of equity risk premiums, by country. I close with an analysis of what currencies bring into an analysis, and why if you are consistent, they should not matter in assessing value at a point in time.

Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/DataUpdate4for 2026.pdf

Blog Post:

Spreadsheet containing country risk measures: https://pages.stern.nyu.edu/~adamodar/pc/datasets/ctrypremium.xlsx