Global Investment Makes the World Go Round

By Nick Newton.

Who doesn’t love the occasional trip down memory lane? Since I’m only a parent/teacher conference away from my 40th birthday, I would like to revisit 1985…my seventh grade year during which Mr. Hearn introduced economic theory.

Think Back to 1985

Ronald Reagan started his second term in office in 1985. Microsoft released Windows 1.0 and Mike Tyson made his professional boxing debut…all in 1985.

The first cell phone call was made in the United Kingdom by Ernie Wise in 1985, and the average price of a gallon of gas was $1.09. Companies generated much of their revenue from within their county’s borders, stock movements were highly dependent upon local economic trends, and the Dow Jones Industrial Average (DJIA) stood at 1546.

Even the Happy Meal is Global

Fast forward 26 years. McDonald’s has more than 18,000 stores abroad and generates well over 50% of its annual revenue from outside the US. More than 40% of the revenue within the DJIA now comes from abroad. The largest bank in the world by market capitalization (shares outstanding x stock price) is in China. General Electric’s largest research and development facility is located in Bangalore, India. And in the last three years only one of the top return-generating companies is located in the United States. Oh, yeah and one of my very best friends lives in Beirut! What has happened? The world has gone global, truly becoming flatter by the second each day right in front of our eyes.

Why is this important? In our first Village article, we spoke of the need to participate in our 401k. Today I am building the case that your participation include exposure to the global offering in your 401k plan. Consider this, the GDP growth rate variation globally has declined steadily as world export has increased. World export for 142 countries as a percentage of GDP has doubled over the last 20 years. Economies of scale have also increased profitability for the largest companies driving the incentive to expand globally. In 2011, more than 21,500 multinational companies are found within the emerging markets alone. And more than 70% of world equity market capitalization is made up of companies conducting their business on a multinational platform.

The Globalization Movement

Investing globally gives you an opportunity to not only take advantage of the exciting opportunities occurring worldwide, but doing so could quite possibly help diversify the risk within your portfolio. Of course, you get some global exposure with portfolio allocations in domestic US equity funds, but the idea here is to broaden your reach and take advantage of all these things that have happened since 1985.

Think about it, in one day millions of people will make a cell phone call powered by hundreds of companies from around the globe. Gas is at least $3.00…not only driven by US demand, but worldwide demand. Microsoft is used the world over on millions of pc’s daily, and is in it 7^th release. And the DJIA is flirting with 12,000. Globalization is very real, and today’s seventh graders are even aware of it.

Nick Newton is Senior VP at Waddell & Reed Investment Management Company.
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