With European sovereign debt soaring and the world economy slowing down, globalization, the increasing integration and interdependence of the world economies has been slowing down, and in some industries, even reversed. What does it mean for investors?
Before we answer this question, let’s look at the history. Remember back in the 1980s and the 1990s, globalization was all about the efficiencies and opportunities open markets create; about easy credit and rising leverage, as money flowed easily across local and national boundaries — setting the world economy into a virtuous cycle of income and employment growth — the good side of globalization. That was all music in the ears of investors chasing after the world’s largest corporations that could sell their products to distant markets with the same ease and speed as in their own home markets.
In the last year, globalization is all about the new risks and uncertainties brought about by the high degree of integration of domestic and local markets, intensification of competition, imitation, price and profit swings, and business and product destruction. Globalization is also about tight credit, de-leverage, and declining money flows across local and national boundaries; setting the world economy into a vicious cycle of income and employment declines: A recession in Greece and Ireland and a slowdown in Spain and Italy, for instance, are followed by a slowdown in France and Germany, which are followed by a slowdown in the U.S. and China, and so on.
Corporations that previously have been enjoying the benefits of globalization, now face unstable and unpredictable demand and business opportunities; and their products quickly become commodities, leaving them little or no pricing power that undermines profitability. Just take a look at the stock of large U.S. export companies after China and Germany released data that showed a slowdown in their economies over the last two days: Toyota Motor Company (TM) down 5%, Honda (HMC) down 3.70%, GM (GM) down 4.79%, Ford (F) down 3.30%, Caterpillar 7% (CAT), Sony Corporation (SNE) down 4.70%, Microsoft (MSFT) down 2.20%, Intel (INTC) down 3.94%, Apple (AAPL) 3.37, Cisco Systems (CSCO) 2.11 %, and 3M (MMM) 6.68 percent.
By contrast, domestically oriented companies like healthcare and utilities have fared better: Aetna (AET) down 1.5 percent, Cigna (CI) down 0.2 percent American Electric Power (AEP), down 0.5 percent, and Utilities Select Sector (XLU) down 0.30. So, what should investors do? Scale back on companies with large international exposure, and buy companies with large domestic exposure.