German BMWs, Japanese flat panel TV's and Venezuelan oil. What do these three things have in common? They all make money! And if you are smart enough, you will learn how to let them make YOU some money. Learn how to invest in the international markets, and you will not only expand your diversification, but also your profitability.
It isnâ,"t always easy to pay attention to the broad scheme of things when we spend most of our days working in a focused environment. But every now and then, it proves beneficial to step back and take a good look at the breadth of your business, in this case, the GLOBAL economy. (Broad enough?!)
Letâ,"s take a look at a few elements that are critical to the macroeconomics of todayâ,"s world. You may not have realized it, but in the last 50 years, the world population has DOUBLED. The Internet has taken over and all of us are now intricately interconnected â,“ ALL the time. â,"Off-shoringâ, and â,"outsourcingâ, has become vernacular. As a result of all this activity, financial markets are now active 24/7. It is no longer a â,"wake up and go to work for moneyâ, situation. Instead, if you are smart you will realize that you should turn the situation around and put your money to work for YOU, and because of our continuously active global economy, you can do this while you sleep! Others, like the Japanese, Chinese, and Indians, are all waking up and taking their turn to go to work, so why not use their efforts to work for your money?
And here is how you do it. Itâ,"s called American Depository Receipts, ADRs for short. Although you can easily buy stock in a domestic company, it isnâ,"t the same for a foreign company. That is why, almost 80 years ago, U.S. banks started buying foreign shares in bulk, repackaging them and selling them in to U.S. buyers. They decided to call this an ADR, and today it presents us with a great way to not only diversify, but also catch opportunities in many other thriving economies.
The important thing to realize with ADRs is that it is foreign, and therefore subject to a completely different set of factors that will influence price movement. In fact, when you think about it, Chinaâ,"s markets will be completely different from European Markets, and Mexico will differ from Africa. You may be thinking about ADRs for purposes of diversification, and therefore you wonder how correlated these markets truly are. Just like sectors in our own economy, it isnâ,"t always so easy to answer this question.
You donâ,"t need much macro-economical understanding to realize that this is a very complex situation. Some sectors are separated, some sectors rely on others, and some sectors are intertwined with others. And the same goes for global economies â,“ they are all related in a variety of different ways, whether it is trade regulations and restrictions, resources, political power or any number of things. Letâ,"s look at an example by charting a popular Brazilian index and a popular Mexican index to see how they relate.
We can learn two main lessons from this example. If you take a look at the â,"94, â,"95 time period for BVSP, you will see that sharp increase, due to inflation issues that Brazil was experiencing. This had very little correlation with what was happening in, and to Mexico. This proves that we have to be very careful in grouping together countries into regions such as â,"Centralâ,, â,"Southâ, or just â,"Americaâ,.
When we look beyond â,"95, and we imagine the two indices on top of each other, we see that they are very closely correlated. What happens to one seems to have a drastic similar impact on the other, but, as we know, NOT ALWAYS. This is further evidence that we have to be very careful about the way that we divide different countries, regions and economies into sections and how we respond to the price movement in those economies.
It would take more than a lifetime to study foreign markets and gain a complete understanding. We have to realize that at some point, we have to make a decision and go with it. Here is a few pointers.
1. Diversify, and take advantage of the multitude of resources with a qualified international perpspective such as The Economist (www.economist.com) and BBC (news.bbc.co.uk).
2. Learn about the various indexes there are that track different economies. Dow Jones and Morgan Stanley have have some great comparable indices.
3. Use this information to study different economies and indices, see how they correlate, and realize what impact certain events may have on them.
4. Gain enough understanding to group these varied economies together into bundles that you can keep track of. Once you feel you have an adequate general understanding, you are ready to take action.
You may wonder why I am so eager to make money in the international markets. Part of it lies in my origins. I grew up in South Africa, a country with great resources and very smart people who have the opportunity to make something great happen. Afterwards I moved to Australia and later on the United States. Observing the differences in economics and politics between these three very different countries gave me an appreciation of the opportunities that capitalism presents.
After all, when you zoom out and take an objective view, all you are really doing as an investor is â,"bettingâ, on capitalism, and I would say that has been proven to be a pretty safe bet. In a world where Indians, Chinese and Europeans are working with Americans in the same office, but in different countries, where international mergers and acquisitions are commonplace and communication is virtually unlimited, we are facing a greater and greater chance that capitalism will gain more and more international respect. Betting on the expansion of capitalistic ideas and the increase of global wealth seems like a very good choice to me. There are many profitable opportunities out there, so learn how to interperet these international markets to work for you, and as a result, make some money.
Price Headley is the founder and chief analyst of BigTrends.com.
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