We have all become accustomed to hearing about financial problems in a country on the other side of the world and being told that it is going to affect our markets. It seems that Greece gets a cold and Australia gets the sniffles. And of course, if the giants of Europe, the USA or China wobble, the rest of the world staggers too. The world’s financial markets are all interconnected and, these days with the speed of international communications, reaction times can be pretty much instantaneous. This creates both risks and opportunities for investors and should be built into personal investment strategies.
“Global asset re-composition”?
It might all sound a little too difficult to comprehend when, according to the International Monetary Fund (IMF), illiquidity and losses in markets translate increasingly quickly into “global asset re-composition.” But really all this means is that when world markets perceive a problem in a particular country or region, they move assets around very quickly to protect against potential ramifications. This being the case, local fund and market administrators, as we have seen in Australia, are relatively powerless to control those changes.
This globally connected system has benefits in terms of scale and being able to pool risks; positive events can be translated into profits very quickly. But the markets have still not forgotten the GFC, making them quite reactive in times of negative events and actions are often amplified as they ripple through the international markets.
Acting big but thinking small
This has not always been the case. Over the last 30 years or so, we have seen great advances in technology and communications between countries, organisations and markets. Additionally, the external assets and liabilities of countries as a share of GDP has increased more than six times; there is lot more money around these days. The combination of factors means that all this money can be moved around a lot quicker over significantly more systems than previously existed.
The IMF says that individual agents, whether they be nations or corporations, do not tend to take into account the effects of their actions and reactions on others around the world. Whilst the financial systems have transformed quickly, individual mindsets have been slower to change. According to the IMF, this increases the potential for systemic risk.
The IMF is now involved in mapping the global financial markets, in part to determine which countries and institutions are at the centre of these actions and how those on the outskirts are affected.
However, none of this means that the individual investor should feel intimidated or vulnerable in terms of their own portfolio. The global market is a reality but it certainly presents both benefits and risks. We would love to help you understand the composition of your investments and how it should be designed to adjust to the changing world.