Did you know that the entire country of Greece is having money problems? In fact, they have been having the problems for quite some time now. Did you realize that it is dragging down a big portion of Europe’s stock markets and the Euro is suffering as well? A lot of people do not keep up with economic news, especially international economic news. We have enough of our own problems on this side of the ocean to keep us busy instead. But you should care about the world’s economic woes. But, we should know a little bit about the investing world that is happening overseas.
Higher Costs. The Euro is at a four year low against the dollar. Normally, we would think that that it would not matter unless we are planning our next European vacation, but it does matter. We are an importer country. We bring in far more goods than we export now. Granted, most of our exports come from China. But, there are tons of multinational conglomerates that conduct business in Europe. So, for investors, high costs for businesses overseas in Europe thanks to a falling Euro lowers the amount of profit that those companies make.
Globalization. US corporations and their market capitalizations only account for 43% of the world’s total stock market value. That is not even half! 57% of the world’s public companies and economies are outside our borders. We are now highly correlated thanks to globalization. When the American market goes up or down, the international markets are sure to follow suit. Our news affects other countries markets and vise versa. That fact alone should make you want to take notice on what is happening across the pond from us. Hearing what European markets are up to at 8am EST is a great indicator as to what the early morning trading in the US may look like. But, the world’s markets are not 100% correlated.
International Stocks. Hopefully, a portion of your investment portfolio is in international stocks and international mutual funds. You might wonder why in the world you would want to invest in a section of the globe that is struggling after the recession we were just in. But, everyone needs to be diversified between domestic and international stocks in their retirement and investment portfolios. American investors allocate too much of their portfolios in domestic stocks. We are not alone those. It is a behavioral bias that most investors have around the world even in countries like Japan.
Trouble Spreads. Now that Greece is having trouble meeting its government bond obligations, the problems are spreading across the continent. There are reports that Spain and Portugal’s financial systems might not be as healthy as people would like as well.
So, why do we need to pay just a little (not a whole lot but a little) bit of attention to what is happening in the overseas’ stock markets? We have to pay attention because it affects us and our investments here at home. We can no longer hide our heads in the sand and hope other people’s problems stay over there. The world is a much smaller place now, and we have to take notice.