GOING GLOBAL
It has been compared to gravity, the speed of light and the sun
rising in the morning. Globalisation is perhaps the dominant force
in today’s world – and a vital consideration for investors. The first
three months of 2011 have provided ample illustration.
Turmoil in the Middle East and North Africa has helped to drive up the oil price, prompting a surge in oil-related stocks worldwide. Meanwhile, higher fuel costs have exacerbated inflation in the developing world, where food prices were already rising steeply (higher food prices were a major factor in the initial uprisings in the Arab world). In turn, rising commodity prices are largely due to the developed world’s adoption of quantitative easing to dig itself out of the economic slump resulting from the global financial crisis. That crisis was truly global in its origins, with Asia’s entrenched saving habit fuelling the West’s debt binge.
Most recently, the starkest example of the interconnectedness of today’s markets has come from the tragic events in Japan. The dreadful human toll has been confined to the Japanese mainland. The economic consequences, however, will be felt around the world. The catastrophe has done considerable damage to the country’s power infrastructure, with huge ramifications for the global tech sector, particularly for semiconductor manufacturers.
Semiconductors are crucial to any product with electronic components. Japan remains the dominant supplier of two of the most important elements used in semiconductors: BT resin and 300mm silicon wafers. Making either requires uninterrupted power supply, so the disruption to the country’s energy infrastructure effectively closes capacity in affected areas. Another headache for car manufacturers will be the supply of microcontrollers – the tiny computers that control functions in automobiles. The world’s leading supplier, Resenas, has had to shut down its main Japanese plant.
The resulting loss of business, coupled with disruption to other industries, threatens to tip Japan back into recession. At the very least, the scale of the human tragedy will have a considerable impact on consumer confidence there – which may hurt global manufacturers of luxury goods. Meanwhile, doubts about nuclear power mean that alternative sources of energy – most notably natural gas – will command higher prices. This will benefit companies that produce these commodities, but will hurt many other firms, whose margins will be squeezed by higher input costs.
So what does all this mean for investors? The tragic events in Japan have obviously affected the domestic stockmarket most in the short term; Japan was the worst-performing market in the FTSE World index in the first quarter of 2011. Geographic asset allocation still has some relevance, then, but it is becoming far less important in an increasingly open global market place. In picking stocks and constructing a portfolio, what matters most is not a company’s country of listing, but where it derives its earnings (and, as the earthquake’s consequences demonstrate, its supplies). For example, it makes little difference whether Rio Tinto and BHP are described as UK or Australian companies – their earnings profile remains the same. In the same vein, the outlook for AstraZeneca and Pfizer is driven by their drugs pipeline, not the fact that one is quoted in the UK and one in the US.
The second lesson is that in a globalised world, it’s extremely difficult to predict all the knock-on effects of any particular development. The scale and complexity of the task is too great. But what we can do is focus on the prospects of individual companies. For stockpickers, company fundamentals are the thread that will lead us through the labyrinth of a globalised world.
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