The U.S. economy’s success and struggles impact global investors. Jeffrey Morgan, CEO of the National Investor Relations Institute (NIRI), explained during a Skype call with my investor relations class, global investors will take into account what is going on in the United States, whether it be a political issue or economical issue, they look at America’s market when discussing businesses and stocks. Although international investors do look towards the US economy, they do not always need to react.
Morgan made it clear that all global economies interact differently whether they are currently in recovery, a healthy state, or on a downfall, no economy is the same. Because of the differences in current activity, global investors may not always be influenced by what is going on in the United States.
Although America might not be as large as an influence as we may think it is, global investors were concerned during the last six months because of the state of the economy. One of the main struggles America faced recently was the fiscal cliff threat. Despite this being an American issue, global investors faced problems and had their own concerns with this money matter. According to a survey by Bank of America Merril Lynch 42% of global investors said the fiscal cliff was the “tail risk” for investors.
SeekingAlpha.com defines tail risks as “…strategies are essentially designed to perform well in the worst of market conditions. They act as insurance policies, requiring investors to pay in to a losing strategy until something bad happens. Tail-risk hedges are said to be most effective in environments where market participants see declines of at least 20%, providing much needed liquidity while the rest of their portfolio is spiraling toward the bottom.”
Although a tail risk is a very unlikely problem, investors still looked towards the US economy’s downfall as a hurdle, and tail risks can present problems if the hedge fund goes wrong.
“America’s influence over the global economy is still overwhelming,” said Mike Lenhoff, the chief strategist at Brewin Dolphin in London. Not only is America the leader in the world’s stock market capitalization with about 32.7%, (shown in the graph), but America is also the leader in the world’s equity market according to BeSpoke Group.
America is still leading the world in market capitalizations, and because of this, the United States will continue to have some type of an influence on surrounding countries and their global investors as we continue into the future.