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INVESTOR, MAKE THE WORLD YOUR OYSTER
These are trying times indeed for investors. The U.S. economy is in fine shape, but stock prices are ricocheting in late-day trading, the Dow Jones industrial average is 500 points off its all-time high, and there are some seers who think the market is in for more difficulty in the months ahead before the bull roars on. In Asia, meanwhile, a string of currency crises has unnerved investors, sending even Hong Kong's venerated Hang Seng index off 7% since early August. Japan's market remains in the doldrums, with the total capitalization of the Tokyo Stock Exchange hovering around $3 trillion, well below the $5 trillion peak of 1989. In Europe, worries about monetary union have finally infected the exchanges, with Germany's DAX off 10% since the end of July. Only in Latin America do both economies and markets seem to be rallying.
With jitters across the globe, what's an investor to do? Diversify. Geographic diversification is the right way to go over the long haul. There was a time, 50 years ago, when the U.S. economy and the U.S. stock market so dominated the global landscape that it mattered little to investors what happened elsewhere. No more.
Of course, if all the world's economies and financial markets moved in lockstep all the time, diversification would be pointless. But that circumstance is rare. Cast a glance at the world scene. Markets are agitated, but the underlying economic fundamentals, hence the outlook for profits and stock prices, vary widely. In Japan, for example, the economy is weak and possibly heading for recession. But ever so slowly, government micromanagement is beginning to give way to deregulation and a more open economy (page 110). The go-go emerging nations of Asia, facing currency pressures, no longer can depend solely on the old export-led model of growth. If this trend continues in Asia, it could lead to economic growth that is domestically led and more balanced.
Europe, by contrast, is undergoing a wrenching shift away from the welfare state, with bleak economic consequences in the near term: high unemployment across the Continent, industry restructuring, beleaguered governments. However, in a few years, Europe should emerge stronger, much as the U.S. economy did after corporate restructuring and government budget-cutting. In fact, until recently, the DAX was extremely strong, apparently reflecting such expectations.
For investors concerned about currency gyrations, opaque accounting, and lack of disclosure overseas, there are plenty of ways to obtain geographical diversification--ADRs, mutual funds, and even U.S. companies with big international operations. Diversification is the best way for investors to cast the widest net and participate in global economic growth, wherever it occurs.