We’ve been hearing for years about the closer integration of the world’s economies and markets. Companies operate seamlessly across borders; location of headquarters and stock listing are increasingly matters of choice; investors think globally.
Yet some features of individual markets remain. Last week, James Barber (Russell’s Chief Investment Officer – Equities) was presenting to the institutional team his global equity market outlook and highlighted some significant differences in valuation: U.S. stock market valuation is currently fairly high, while many other markets (especially emerging markets) are fairly cheap. Hence my question to him: whatever happened to globalization?
I’ll summarize his response:
Firstly, it’s amazing what a financial crisis can do. Even though global trade continues to increase and investment continues to become an ever more global business, policy responses to the crisis varied dramatically. The European Central Bank, for example, is now seriously considering quantitative easing—just as the U.S. Federal Reserve is winding down its own program after six years. And exchange rates took on a more central role as an instrument of national policy; but not everyone can devalue at the same time. Hence the stresses of the financial crisis accentuated policy differences, at a time when policy considerations have been especially important for financial markets. So national boundaries continue to matter.
Despite that, the growth of global trade and the integration of financial markets really has continued apace. An April 2014 WTO press release announces “modest trade growth anticipated for 2014 and 2015 following two year slump” …which sounds grim except that the slump in question is a growth rate of “only” 2.2% a year and the “modest” expected future growth exceeds 5% a year. Globally, 2013’s total export volume was more than 3 times that of 1990.
Economic cycles and the cycles of value and growth and other factor exposures have also continued to move closer together—observations supported by both anecdotal evidence and quantitative analysis. So while national policy differences remain, most other market drivers are indeed more global today than they have ever been.
The globalization of financial markets has not stopped.