The Global Economy and Its Effect on Investors

Over the years, the term "globalization" has been used more and more frequently, especially in the arena of finance and economics. Let's face it, we live in a global economy so changes in one country can cause changes in other countries around the world. Sometimes these changes are positive, other times they are not. Allow me to discuss the topic of globalization and explain what it means to investors.

The Beginning of Globalization

Globalization refers to the unrestricted movement of goods, people, capital and ideas around the world. It's a trend that dates back to the late 1800s, when the telegraph and the steamship were created. Developments such as these enabled cross-border movement quickly, easily and cheaply. That was the beginning of globalization and of market capitalism.

Progress Over The Years

Today, progress has made the world a truly global economy. Take a look at the following cause and effect relationships:

• Japan sells its currency causing the yen to drop. A weak currency boosts profits for the country's top automakers, causing the price of Toyota to increase and the price of GM to decrease.
• A drop in oil prices boosts prospects for a global recovery. Lower oil prices leaves individuals and companies with more to spend. This may cause the price of Air Canada to rise (since they're reducing operating expenses) and the price of oil stocks to fall.
• When commodity prices rise, it's good news for the loonie and Canada's stock exchanges. With Canada still considered a commodity-based economy, the TSE 300 benefits from strengthening prices for lumber, metals, etc.
• The September 11th attacks spark a flight to quality, prompting investors to seek low-risk investments. Tourism and insurance companies are hit the hardest. Share prices for the Four Seasons Hotel drops. Insurance companies fall as well. Uncertainty motivates investors to invest in stable blue-chip stocks, until markets gain steady ground again.
• The U.S. economy, the largest economy in the world, experiences a recession, spurring a global slowdown. In turn, the price of gold rises as investors around the world search for a store of value.

As you can see, the effects of both minor and major events can travel through our global economy. So what does this mean for investors?

effects on investors

Being aware of global economic trends can help you understand movement in the market and your portfolio. But don't rebalance your plan according to every piece of news you read. Simply be aware of events around the world and get to know how they may impact your portfo- lio. Remember, you're an investor, not an economist. So if you have questions, give me a call. I would be happy to provide more insight on the topic.