Global markets decline - is there a value in international diversification?
January 21, 2008
By: 
Arohan
Category: Current Events, Economy, Investing
At the first blush it appears that as goes the US economy, so goes the world market. If the hiccups in the US economy can have such an effect on the markets elsewhere, than it would appear that the markets are now highly correlated. Does this mean that there is no value in diversifying internationally?
I would say that is not true. What we are seeing is how the markets act on a daily basis. True, that over a short horizon, the markets may be correlated. After all, we now live in a global economy where many companies are traded on exchanges in many different countries. However, over a longer term, each market performs based on its own fundamentals. Many emerging economies are growing today based on the fundamental changes in the business processes and political environment. Unless there is a drastic change in these, which I do not see happening any time soon, these markets will continue to do well
At the same time, do not write off the US economy. There have been countless such cycles in the past. It is true that the baby boom factor may not be present anymore, but the US economy is now driven by innovation, risk taking, and generally sound economic principles. These are still here (although one may question the soundness of economic principles involved in the subprime situation, but that is just a small component of the economy, it will probably do some damage in the short term but it will soon pass)
Regardless of the macro-economic picture, the basic value investing credo of finding value at a cheap price has stood the test of time and will likely continue to yield market beating results over a long investing horizons
Related posts:
- Will US fall into recession this year - or is it already in one
- US economy long term - whereto from here
January 21st, 2008 at 7:34 pm
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Allen Taylor
January 22nd, 2008 at 4:10 pm
Thanks Allen! I love to hear back from the readers so please keep the comments/feedback coming
January 23rd, 2008 at 12:25 am
I was very interested by your take on the Global market, but I fundamentally disagree with your opinion that this current situation will soon pass. The ‘Housing Bubble’ was seen as a way out from the collapse of the ‘Dot Com Bubble’. the trouble with bubbles of course is that they always burst!
I fear that this is likely to be the deepest (and longest) recession seen since WWII
John Green’s last blog post..The Fed is Too Late with Interest Cut
January 24th, 2008 at 7:08 pm
John, I appreciate your comments! I agree that the ramifications of the housing bubble bursting will be felt for some time. However, I think it would be fairly limited to the housing sector and ancilliary sectors, which is just a small part of the US economy. The crisis today looms larger than life in people’s minds due to 2 things.
1. News media is filled with the large losses that the financial institutions are booking due to their subprime exposure, including the tales of bankruptcies
and
2. For many, the crisis is personal
But the financial sector will re-structure and move on. Homeowners will adjust (may take some time) and move on. As long as the industry in the US is not affected, employment and purchasing power of the people does not decline significantly, the economy will get over this
My position in this is that the US economy is much larger than the housing sector and that will continue to grow due to inherent strengths in the US economic system
January 24th, 2008 at 8:27 pm
Glad to hear you say the economy has not tanked. I have been worrying about the deficit and the money spent on war. Things are not great down here in Texas, but at least most of the economy diversified after the oil industry bust of the 1980s.
I worry about us sending jobs overseas. I know it allows manufacturers to be competitive, but it seems wrong, somehow.
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January 25th, 2008 at 1:25 am
I also would like to say thanks for saying the US economy is not in the tank. Sure there are pockets here and there, and I agree, the housing market is just one part of the economy, but overall, it is still good. Alot of the problem, is as you mention, the news media. IN this age of 24/7 news, they need to find something to tlak about, and let’s face it, bad news sells better than good news. I’ve personally seen it, and been told by journalists who have seen it and done it, that it is not unheard of to “make” news, to get attention for themselves. I’m afraid the economy may get worse, but more as a self-fulfilling prophecy, because that is all we are hearing about, and if you hear something long enough, you start to believe it.
Steve’s last blog post..Legal service plans - are they worth it?
January 25th, 2008 at 2:52 am
You might enjoy reading the book “Prophecy” by Robert Kiyosaki.
The baby boomers will have their greatest impact yet in the coming years.
“Prophecy” should be required reading IMHO.
I’ve read it twice and I’ve been feeling like I need to go and read it again (and i almost NEVER read a book twice let alone 3 times!!).
It might be a bit of an eye-opener as well…
Pam Hoffman
http://seminarlist.blogspot.com
Pam Hoffman’s last blog post..Breakthrough to Success Weekend
January 26th, 2008 at 2:28 am
Yup, I would tend to agree with you. It amuses me how much people are freaking out over this… ignoring that fundamentally, the economy has grown over the past 100+ years and will continue to do so, the average 11% stock market returns, etc. It does make for a good time to buy, though, when everything is trading more cheaply as a result of all this overreaction.
Inquisitor’s last blog post..How Investment Bankers Decide If You Get An Offer
January 26th, 2008 at 2:35 am
Interesting recommendation about the “Prophecy” by Pam. Usually the “Rich Dad / Poor Dad” author gets panned by the high brow investors. I haven’t read that particular book but I always enjoy new ideas.
mariam’s last blog post..Stock Market Rules: Good Companies Buy Their Own Stock
January 29th, 2008 at 3:50 pm
Great article! I was just watching report on business television and a lot of the North American Car companies have seen major growth in the international markets. Some companies are saying it’s almost enough to off set the lack of sales in North America! I mean I don’t hink it’s will generate the number and profits that North America normally would but ti’s something to fill the gap and maybe even something that will keep the United Stats from going into an early recession!
blogengage’s last blog post..Life Talking Too
January 29th, 2008 at 8:02 pm
@CyberCelt: Interesting observation about the jobs moving offshore. Eventually the wealth of any economy is made up of producer wealth and consumer wealth. Longer term, with offshore jobs providing better value to US producers, the producer wealth will increase. However, the consumers may or may not be better off (it is a tradeoff between cheaper goods vs loss of jobs)
One way the consumers can actually grow their wealth in this scenario is to own equity in the producers that are benefiting from globalization.
Although where does this leave the economy as a whole (better off or worse off) is something that I am sure a lot of economists are debating now and will continue to do so for some time
You also have to remember that these things are not as clear cut. Not only we have movement in jobs (and value creation) but we also now have movement in investor dollars (foreigners investing in US economy or vice-a-versa), as well as physical human movement at a much greater scale than any other time in history
All I can say is with such fluidity in the system, overall the planet will be okay and the human condition will improve.
@Steve: Agree with you on the media’s propensity to amplify short term issues and missing the big picture
@Pam: I have not read the book. I will be sure to check it out. Thanks for the recommendation!
@Inquisitor: I hope you were able to find some good values in this market. The gutsy few will create the most wealth
@mariam: Kiyosaki is panned by most high-brow investors but I feel there is an underlying wisdom in what he writes. I do not believe anything that he states as a fact and some of his logic may be flawed but basically what he has done is to take some good principles, cloak them up under layers of populism so he can sell his books. On a more detached level, you have to admire the man and his business model. If he was not a rich man before, he certainly is a rich man now after all these books and that itself can be a lesson
@blogengage: I am glad you liked the article. Here is the scary thought: In this world of sovereign wealth funds, it may now be very unlikely for a developed economy like US to go into recession UNLESS the entire world plunges into one
Sorry it took me some time to respond but I really appreciate your comments and the resulting dialogue. Thank You!
January 29th, 2008 at 8:56 pm
@blogengage: I am glad you liked the article. Here is the scary thought: In this world of sovereign wealth funds, it may now be very unlikely for a developed economy like US to go into recession UNLESS the entire world plunges into one
Sorry it took me some time to respond but I really appreciate your comments and the resulting dialogue. Thank You!
No problem and you have a great point here! China is boombing etc.. yata yata
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