The term global village is often used to describe the digital world that permeates our lives. Not much is spoken about the trade linkages that have dramatically grown across the world in the last two decades. As the digital world grew, so did trade between countries. Today the term global village applies to trade as well.
While the benefits of developing trade linkages were obvious, not much importance was given to the potential risks from the growing trade bonhomie. The shift in the trade patterns and complexity of the linkages for economies has brought macro-economics back into the center-stage of all investment decisions.
More than ever, it is time for financial advisors and investors to understand the macro-economic implications for making investment decisions. A simple example could be the current state of Brazil, which has slipped into recession. Brazil largely depended on export of oil, soya and other natural resources primarily to China which accounted for 18% of it’s exports. The double whammy of China slowing down and downward movement of oil price effectively pushed Brazil into recession. While domestic issues play a major role in the economic growth prospects, the macro impact of China and oil are too big for Brazil to handle. For a financial investor, ignoring the macro picture and inter-linkages with China and oil would be catastrophic.
Similarly, the change in US interest rates could impact dollar value across emerging markets, and directly have an implication on inflation and currency value of the respective countries. Trade is no longer limited to goods but also the money that flows between the countries.
Understanding macro-economics and its implications on investment decisions has become key to successful investors. From the data given above it is evident that India will be less impacted due to the slow-down in China when compared to Brazil or Australia. Similarly, lower oil prices would help India by reducing its current account deficit significantly. These two data points can drive an investor towards taking more exposure to the Indian markets when compared to Brazil or China.
Collating the macro signals and introducing them into the financial models results in effective financial modelling and superior risk adjusted returns for investors. However, this may be tough at an individual retail investor’s level. While it is difficult, it would definitely pay for investors and advisors to look at the macro picture more closely than ever. By undertaking constant data mining and keeping a close tab on macro-economic movements across the globe, a professional financial advisor really adds value. Based on expertise, experience and technology, the advisor will create an investment decision matrix that is customized yet affordable.
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