Global Economic Trends Shaping Investment Decisions Today

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In the current inter-linked global financial system, you cannot invest in isolation without considering the economic developments at the global arena. Returns on your investment are not only determined by economic factors within your local market, but also by their interactions with trends in the international markets. In that regard keeping in touch with the rest of the world and being updated on a regular basis is a key investment strategy in our world today.

Among the top global trends affecting how your investment portfolio will perform is the upcoming United States of America presidential elections. It is said that whoever occupies the White House does not affect your investment and therefore you should not be worried about the elections. However, the fact of the matter is that the process leading to the election of a new president always results in market volatility and hence it has a direct impact on your investment portfolio. The effects from the elections are in most cases short-lived since after the elections everyone goes back to their normal lives and he markets stabilize thereafter.

This year’s elections are however different and they may have longer implications to your investment decisions going forward. If Donald Trump wins the elections, many investors fear that he might enforce extreme international trade deals changes with the rest of the world especially with China. These will have a ripple effect to other countries since US being the global super power; a change in its trade policies affects many other economies around the world. On the other hand, if Hillary Clinton wins the elections, investors feel that she is open to international trade deals and relationships with other global economic power houses will not be tampered with; hence maintaining stability in capital flows and foreign direct investments.

The other major global economic trend to watch is the unfolding in the European Union after the United Kingdom voted to leave the economic union last month in June 23rd. The Brexit vote had started generating bad blood between Britain and the rest of the European Union countries; with the former vowing not to support Britain at all in case they face any huddles after the exit. The remaining EU countries who were all opposed to the exit vote assumed that the exit of Britain would not affect them in any away. However as Anthony Di Maggio, an analyst from SternOptions.com notes, “Brexit vote will have a significant financial impact to the European Union since the United Kingdom was one of the largest contributors to the EU’s budget.” Key economic decision makers from across the world including central bank governors are still monitoring the progress in the European Union to see how far it will affect their own local economies and prepare to absorb the shocks.

The US is contemplating an increase in interest rates as the US economy growth becomes more stable and predictable. If the interest rates rise, we then expect more investors to move their money back home from the developing economies where they invested in search of higher returns than what they could get back in the US. As capital flows change their course to the US, the developing markets will face high capital flight as money supply increases in the US. This will then trigger inflationary pressure in the US and potentially result to a depreciation of the dollar. The dollar has been strengthening against other major world currencies as its demand increased due to the speculations that the interest rates will be raised. Following the Fed decision on the interest rates is therefore among the top trends being watched by investors in order for them to decide where to invest their money and how to distribute it within their investment portfolio.

A t the beginning of the year China rebalanced its economy and restructured it to focus more on consumption as compared to being export oriented. Although, the effect was highly felt at the beginning of the year and them got eclipsed by other major economic trends globally, the long-term significance of the move made by China cannot be overlooked. As China boosts its consumption, investments in fast moving consumer goods for the export market to China will be a strategic move in targeting the more than 1 billion people living in China.

8 thoughts on “Global Economic Trends Shaping Investment Decisions Today

  1. Ciao DH,
    Totally agree with you, markets are getting more and more interlinked, if not just because news fly very fast from a side to the other of the globe and investors are quite irrational most of the times, resulting in increased volatility. So far Brexit proved to create havoc on the markets in the short run, but all losses are now taken back, while the longer term effects are already showing (pound weakening, BOE cutting rates), my take is that the UK has got a difficult journey ahead, and negotiations have not started yet… US seem to be on the right track, with the Tramp wildcard on the table. If he wins it’s going to be a major issue for all of the world. China was the culprit for the 2 flash crashes of the past solar year (August 2015, Feb2016), it might happen again as they are very media UN-friendly and tend to shoot reforms without no previous intel at all. But to your point, it’s all true, I am restricting the number of options that I am loading in November for example, as “you never know” what it might happen with the US elections…

    ciaociao

    Stal
    Stalflare recently posted…Options Trades RoundupMy Profile

    • Hi Stalflare,

      I don’t think anyone will disagree with the point that all markets and general economic conditions are interrelated. It seems like when one country sneezes the rest of the world catches a cold. And in recent years it doesn’t even have to be the large economies of the world that can wreak havoc on the financial markets. Not that long ago, the much smaller economies of Greece, Cyprus, Spain and Ireland caused as much panic and uncertainty as Brexit, the shrouded Chinese economy and other much larger economic players. Look at how the oil producing countries affect not just the energy markets but the general markets as well. The last seven months have seen the American markets move in lock step with the oil markets. Why? One thing is certain though… “you never know.” Thank you for commenting.

  2. Diao DH,
    In my opinion the amount of investors has grown as well, it’s not just the news or the interlinked economies. I’d add that investing is easier now and lots of people who understand very little are on it big time, meaning stronger swings when some bad times hit. Same goes for the easy access to leverage and credit (all multipliers in the “mood swings” of all the markets). Sprinkle a bit of crazy derivatives and you see why a consensus miss on earnings of 3% can get a stock fall 20% in two days… 🙂
    Ciao ciao
    Stal
    Stalflare recently posted…Options Trades RoundupMy Profile

    • Hi Stalflare,

      That’s true. I remember when I first started investing all stock quotes came from the newspaper or you had to physically go to your brokerage office and use their computers for stock quotes. There are more investors today and investing has become a lot easier as well. Those mood swings you speak about are all magnified because of this phenomena. Of course, those 2X and 3X new ETFs don’t help either. Thanks for commenting.

  3. Even though it’s popular if we see a downturn like 2008 people will sell and not get back in.

    To me it’s a shame because if they will take gains or small losses instead of weathering the storm.

    I read stories of people who pulled out of the market in 2008 who were young but none of their stocks were dividend stocks.

    Hopefully if nothing else people can make smart decisions reading these blogs

    • Hi Doug,

      Being a long term dividend growth investor often means having to weather those tough down cycles which inevitably come up every few years. For me, I plan to hold all my dividend paying stocks as long as they continue to pump out cash. Of course, if a serious dividend cut or elimination occurs it may be grounds for a sale. Patience is key as well as having faith in your portfolio holdings and diversity. Thank you for stopping by and commenting.

      • Patience has really been the key as I stuck with BAC through the downturn and bought ford right after they cut their dividend. Both have taken awhile but I’m hoping it was worth it. Ford might struggle for a few more years but I do believe they will be prosperous again as it seems the auto market does go through a fair share of headwinds but those I look as good buying oppurtunities

        • Hi Doug,

          Like you, I stuck with a few dividend cutters as well. I held on to my GE, WFC and IR through the 2008/09 down cycle and am happy that I did not sell. I simply kept adding to those positions and averaged down my buy price all the while collecting (albeit less) dividends. Thanks for the reply.

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