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The Impact of Global Economic Trends on Personal Investments*

When you’re looking to make your money work for you, keeping an eye on global economic trends is essential. These trends are like ocean currents that can propel your investments forward or pull them under.

You’ve likely heard how changes in interest rates, inflation, and economic growth rates can ripple through markets worldwide. But figuring out what this means for your individual portfolio can feel quite complex.

While your personal investments are up to you, it’s important to bear in mind your overall risk tolerance, or how much risk you’re willing to take with your investments at any given time. Your risk tolerance can and should change over time.

Understanding global market forces can empower you to make informed, timely decisions to grow your investments while remaining comfortable with your level of risk.

Interest rates and inflation.

Two big economic factors that affect your investment returns are interest rates and inflation.

Interest rates are set by central banks—such as the Federal Reserve—as a way to control the supply of money in an economy. When interest rates rise, borrowing costs also go up, leading to higher mortgage and credit card rates for consumers. When interest rates fall, it can spur businesses and individuals to borrow more money and stimulate economic growth.

In times of high inflation, the central bank may raise interest rates to increase borrowing costs. This, in turn, can help curb excessive spending and slow down inflationary pressures.

What does this mean for your investments?

  • Bonds: When interest rates go up, prices for existing bonds usually go down, because new bonds will be issued at the higher rate, making older, lower-yielding bonds less attractive. Conversely, when interest rates go down, bond prices usually go up.

For example, if you buy a 10-year bond for $1,000 when the market rate is 3%, the bond’s coupon rate (which determines the rate of return, such as through annual or semi-annual payments) will remain 3% for the full term. If, a year later, the market rate for 10-year bonds is 4%, your bond will be less attractive than a new bond, meaning the price you can get for selling it will probably be below $1,000.

By contrast, if you buy that same 10-year bond at 3% and the market rate drops to 2% a year later, your bond’s higher coupon rate will be more attractive than new 10-year bonds at the 2% rate, so you will likely be able to sell it for more than your $1,000 purchase price.

Inflation can impact bonds in a couple of ways1. It reduces the present value of income generated by a bond, and, when central banks raise interest rates to curb inflation, the value of bonds you already own decreases.

  • Equities/Stocks: Higher interest rates can force businesses to pay more to borrow money, raise prices for consumers, or both. This can reduce their overall earnings and lead to lower stock prices.

Additionally, inflation reduces consumer purchasing power. As the cost of necessities goes up, consumers will have less to spend on luxury goods and services, which could impact earnings for businesses. However, there are some types of stocks which may be able to withstand the effects of inflation1.

Adapting to rate changes

In 2021 and 2022, central banks around the world responded to rapid inflation with rate increases, making borrowing more expensive. This meant your loans and credit card rates likely went up, but so did the interest on savings accounts.

Your investment strategy needs to adapt to these changes. Generally, with higher interest rates:

  • Assessing market trends can be helpful. If you think rates will drop soon, it might be time to invest in a longer term investment like a 10-year bond to lock in a desirable rate. On the other hand, if rates are likely to rise, you might want to sell your long-term bonds while their rate remains attractive and focus on investing in shorter-term, more liquid options.
  • Paying attention to inflation statistics can offer clues as to what actions a central bank might take with interest rates, giving you a chance to buy or sell bonds strategically.

A diverse portfolio that includes both stable investments such as bonds along with riskier (but possibly more lucrative) investments may help you weather market fluctuations. Finding that balance can be tricky, but you don’t have to make decisions on your own. Our network of Financial Advisors can help you customize a plan that fits your needs, goals, and risk tolerance, and provide guidance when changes in the market occur. You can schedule a complimentary consultation today.*

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

Global economic growth.

As the world becomes increasingly interconnected, global economic growth has become a major factor in investment decisions. It often means more opportunities for businesses to expand and succeed, creating new opportunities for investment.

woman drinking coffeeEconomic growth typically leads to increased corporate profits and consumer spending. 2023 saw the US economy grow by 2.5%, with consumer spending alone growing by 3.0%. During such times, sales of products like smartphones and clothes may surge, while industries ramp up their consumption of commodities like oil and metals to support growth.

Certain sectors, especially technology and consumer goods, flourish during these periods as people splurge on the latest innovations and luxuries. However, utilities and telecoms may not experience the same growth, since usage of electricity or phone services doesn’t necessarily increase with a better economy.

To harness the potential of global economic growth, investors should monitor key economic indicators like GDP, consumer spending, and employment rates. These metrics shed light on an economy’s health in a few ways:

  • A country’s Gross Domestic Product (GDP) essentially measures the goods and services produced by a country for a given time period. Changes in the GDP reflect the country’s economic growth. The GDP is also used for comparing socioeconomic data between different countries2.

Strong economic growth can be a boost for stocks as it indicates the possibility of increased profits for a business. On the other hand, strong growth can make a fixed-rate bond less attractive because the returns are potentially lower relative to other investment options.

  • Consumer spending is a strong indicator of what businesses and industries are performing well. If spending drops for a certain business, they may need to make adjustments, such as creating new products or services that increase demand. High spending levels may also cause businesses to increase prices, possibly leading to inflation.
  • Employment rates can reveal a lot about how the economy is doing. If unemployment rates are high, you might expect an eventual decrease in consumer spending, productivity, and corporate profits, leading to a drop in stock prices. In turn, the central bank may lower interest rates in an effort to increase spending and create new jobs.

If unemployment rates are tending to stay low, that’s a sign of a thriving, productive economy.

When investing during a growing economy, focus on sectors such as technology and consumer discretionary spending. These types of investments often exceed expectations during times of global economic expansion. Emerging markets also present attractive opportunities, as they tend to experience faster economic growth compared to developed markets.

However, diversification remains key. This means balancing growth prospects with investments that offer stability and risk mitigation.*

Currency movements.

Globally, currency values fluctuate constantly due to economic conditions and geopolitical events. If a country’s economy is booming, its currency might strengthen compared to others. On the flip side, political unrest might weaken a currency. Investing across borders introduces an additional layer of complexity, which can have direct and indirect effects on your potential investment returns. For example, changes to the exchange rate can have a dramatic effect on the value of your investment in a foreign currency.

Currency movements can also impact consumer behavior and international trade. For example, a strong currency might hurt a country’s export competitiveness, potentially affecting the profitability of companies selling goods and services internationally. On the other hand, a weak currency could boost export competitiveness but also lead to inflation due to increased import prices.

Are you exposed to currency risk?

When evaluating your portfolio, there are a few currency factors to consider:

  • Is your currency investment portfolio dedicated to just one currency?
  • Do you have future exposure due to potential liabilities and payments, such as a loan in a foreign currency to fund a business?
  • What are the unique characteristics of different currencies? While macro-economic parameters have a sharp impact on the strength of a currency, there are several unique factors that influence currency movements.

These unique characteristics can be especially important. For example, certain currencies are considered “safe-haven” currencies. A currency is usually deemed to be of safe-haven status if the issuing country has a stable government, relatively low inflation, and highly liquid financial markets. Examples include the Japanese yen and the Swiss franc.

Currency diversification

To safeguard your investments, currency diversification is an important strategy. This simply means mitigating the risk by spreading your investments across different currencies.* You might choose a mix of investments that include some safe-haven currencies in addition to what are called “commodity currencies”—currencies that are more sensitive to the fluctuations of commodities markets, such as the Australian or Canadian dollar.

This can act as a hedge—kind of like an insurance policy against currency risk. Even if one currency tanks, you haven’t put all your eggs in that one basket.

Geopolitical events.

When political instability strikes, it can make waves in the financial markets. Events and topics that can add uncertainty to a market include:

  • Elections (such as Brexit)
  • Energy price shocks
  • Climate change (natural disasters or severe weather events that disrupt the supply chain)
  • Cyberattacks
  • Cross-border conflicts

If you’re investing in stocks, a geopolitical event might mean more unpredictability in your portfolio’s performance. Investment portfolios that are diversified will inevitably see variance over time, so you don’t need to make drastic changes every time there’s uncertainty in the market. However, some industries, like companies tied to global trading or oil prices, might see more ups and downs than others, like a local bakery chain. Having the right knowledge will help you keep your overall plan in mind when making decisions.

When the global political outlook feels like a rollercoaster, you might notice investors shifting to safe-haven assets. Investments like gold or government bonds are thought to hold their value during market shakes.

  • Be aware of regions and sectors tied to your investments.
  • Keep an eye on the news—it could give you a heads-up on market mood swings.
  • Find trusted resources, like a local financial advisor.
  • Diversify to help balance the risks.

Geopolitical events aren’t always bad news for investors. Some political changes can bring about new opportunities for growth or favorable conditions for certain industries. For example, a new government administration might implement policies that favor renewable energy or establish new trade agreements that open up markets for companies to expand internationally. However, these changes can happen quickly, and it is exceptionally difficult to “time the market” to take full advantage of every opportunity. It’s prudent to have a sound strategy that mitigates risk while being positioned to capitalize on growth opportunities over time.*

Technological advancements.

​​Technological innovation constantly reshapes industries and the global economy, often drastically altering the way businesses operate and how consumers interact with products and services. This not only creates new markets but also threatens the dominance of established companies and sectors.

two people working at tech warehouseSmartphones turned the telecom industry upside down. E-commerce shook traditional retail. These changes weren’t just trends. They’re examples of disruptive innovation—advances that create new markets and value networks, eventually displacing established market-leading firms and products.

Consider the case of streaming services like Netflix or Spotify. They took the entertainment world by storm, changing the way we consume media and challenging cable and physical media businesses. All of this change is happening at an unprecedented pace as new technologies like artificial intelligence, blockchain, and quantum computing continue to emerge and evolve.

The following are some examples of how technological advancements are driving new investment opportunities:

Sector
Impact of Technological Advancements
AutomotiveThe integration of electric vehicles (EVs) and autonomous driving technology is steering the future of transportation, promising enhanced efficiency and safety.
 

Retail

 

E-commerce platforms and AI-driven personalization tactics are redefining shopping experiences, making them more convenient and tailored to individual preferences.

 

Healthcare

 

Innovations such as telemedicine and wearable health devices are revolutionizing patient care, enabling remote monitoring and personalized health management.

 

Finance

 

Fintech solutions, including blockchain and mobile payments, are disrupting traditional banking and financial services, offering more accessibility and security.

 

Education

 

Digital learning platforms and EdTech tools are transforming educational delivery, making learning more accessible and personalized.

 

Energy

 

Renewable energy technologies and smart grid solutions are reshaping power generation and distribution, driving the transition to sustainable energy sources.

Investing in companies that lead tech innovations can be a smart move since they often set the pace and define the future of their sectors. Early adopters can make a significant profit if the new tech takes off. However, it’s not always smooth sailing, and a majority of new products fail to catch on. So early adoption is a “high risk, high reward” proposition compared to more stable investments such as commodities.

Some industries struggle to adapt to technological disruption, and this can affect your investments. Consider how brick-and-mortar retailers have fared in the era of e-commerce, or how traditional taxi companies are competing with ride-sharing apps. Keep an eye on changing market dynamics and adjust your investments accordingly.

Ethical investing factors.

The terms “ethical investing” and “sustainable investing” are gaining popularity, signifying an investment approach that combines personal values with financial decisions.

This method, also known as ESG (Environmental, Social, and Governance) or SRI (Socially Responsible Investing), evaluates companies based on their environmental policies, social responsibility, and governance, emphasizing the importance of carbon emissions, diversity, and ethical conduct. These criteria align investments with personal values while considering the long-term risks and opportunities for companies.

As global issues such as climate change and social justice gain more attention and focus, ethical investing can provide capital to companies committed to improving the world. However, it’s important to note that ethical investing may sacrifice some potential for returns, and can require considerable research to find appropriate investments*.

Pandemics and health crises.

Pandemics can dramatically disrupt the global economy and affect investments. Markets tend to fluctuate significantly during such health emergencies, with sectors like travel and hospitality being particularly exposed to downturns.

During COVID-19, disruptions occurred across many sectors. Travel and dining out were restricted, and the entertainment industry saw many challenges. Supply chains were hit hard, especially in the auto industry. On the other hand, pharmaceutical companies such as Moderna and online merchants such as Etsy did well.

To weather these periods, investors often focus on “defensive stocks” in sectors less affected by economic instability. Healthcare and pharmaceutical stocks are quintessential examples, given their critical role in addressing these crises. These sectors usually maintain or even increase in value due to the heightened demand for medical services, treatments, and vaccines.

Health crises can also accelerate technological advancements and digital transformations within the healthcare sector. Telehealth services and online pharmacy usage, for example, skyrocketed during the COVID-19 pandemic.

Investors should reevaluate their investment strategies and look for companies pioneering digital healthcare solutions during a pandemic, as these may present promising investment possibilities in the wake of health crises.

Empowering your investment journey.

two woman hugging

Investing in today’s world means keeping an eye on the global economic landscape. A variety of factors can and should influence your personal investments, from shifts in government policies to the ebb and flow of international markets.

Understanding these trends is key to making informed choices that align with your financial goals. However, global trends can be so complex and numerous that it would be impossible to keep track of every possible factor. Most importantly, you should stick to a well-planned strategy and be prepared to ride out temporary fluctuations; overreacting to changes is stressful and counter-productive.

Fortunately, you don’t have to develop your strategy all by yourself. Our local professional Financial Advisors are here to help you develop a customized investment plan based on your goals and circumstances. Schedule a complimentary consultation today.

Disclosures

  1. https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp#toc-9-inflation-hurts-bonds–growth-stocks
  2. https://datatopics.worldbank.org/world-development-indicators/themes/economy.html

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