Myths of Global Diversification

Investors have been through difficult times. It is uncertain how long these uncertainties will continue. They have been seeing their portfolios tumble in a matter of days. It is hard to be immune from the vagaries of gyrating investing markets.

Global Investment

Quite often we hear about the need for minimizing the risks of investment. One of the recommended strategies is to diversify globally in the emerging countries. This is based on the assumption that the world is changing fast with new financial powerhouses in Asia, Middle East, South America and Europe.

It has been thought that the world is becoming less and less dependent upon US economy and that economic activity is moving away from US shores. The fall of US dollar and the continuing rise of Euro are cited as examples of dwindling stronghold of US finances on the global markets.

Global Demand is Still Driven by US

Second half of 2007 and the beginning of 2008 put stock and bond markets in turmoil. It is not clear whether the Fed rate cuts and US Government stimuli package will bring out the US economy from the woes of economic slowdown.

However, we have noticed one important thing and that is that the world capital markets are still driven by US markets. US economic slowdown is having an impact throughout the world. The way world stock and bond markets behaved soon after the turmoil in the US markets was a little surprising to the votaries of global investment.

The Rationale

How can we account for the steep fall in world capital markets and the subsequent rise?

We see that US is a huge market for Chinese exports. Any economic recession in the US means negative income. With less money in their pockets, the consumers will not be in a position to purchase more from China. This will impact Chinese exports and consequently its economic growth.

It was assumed that with growing involvement of Chinese economy with Europe, China will be less dependent upon US. However, with less income, US consumers will not be able to buy more from Europe as well. If US spends less in Europe, Europe in turn will buy less from China.

Same is the case with other economies. This only underlines the fact that US cannot be written away as yet. World seems to be deeply involved with US economy. Globally US is not only a major consumer and investor but also a leader in technology. So it seems that there is no escape from the affects of US economic changes for a long time to come.

Investors Beware

From the above the only lesson that we learn is that investors need to exercise more caution while investing globally. If economic conditions worsen in the US, there is no guarantee that we will remain unaffected while keeping our capital thousands of miles away.

World is still looking towards the US not only economically but also as a policeman. What is true internally may not be different externally. Investors have to put in place risk controls and launch businesses with due regard to the US economy and capital markets.

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