The past week has been an interesting one in US stock market. Why? Primarily because of Greece and China. China is raising reserve requirements on its banks, which will lead to reduced lending and, therefore, slower expansion, raising fears about the viability of the worldwide recovery. Greece’s government has basically threatened to default on its national debt, raising concerns about the European Union in general, including the viability of the euro. Germany, the most fiscally conservative country in the EU, naturally doesn’t want to subsidize a country who doesn’t have the same sense of fiscal responsibility. And why should they? It’s the whole ant and grasshopper parable where the ant stored away food for the winter while the grasshopper didn’t and then the grasshopper came asking for some of the ant’s stores when winter came.
But I digress. This blog is not about government fiscal policy. It’s about why no country is an island unto itself (figuratively speaking, obviously, as some countries are literally islands).
Barriers between different countries’ markets are eroding over time. 50 years ago, a company domiciled in the USA might only need to worry about its local market dynamics and local competitors. Now that same company is likely operating in various countries or is somehow reliant upon companies operating in or connected to other countries. That company’s supplier might be based out of a European Union country that uses the euro. If the euro is significantly and permanently devalued, that supplier will receive fewer euros from the American company. While that’s great for the American company in the short-term, it may end up needing to find a new supplier in the long-term if the current one can’t pay its bills anymore.
The point is that when analyzing companies, it’s no longer good enough to just look at the long-term potential of the country it is operating in. We must also look at the long-term potential of all other countries that have a significant impact on the company.
On the flip side, sometimes news affecting one country should have little bearing on a company domiciled in a different country, but the stock price of that company drops anyway. It is at these times that price and value can diverge sharply and present a fantastic buying opportunity.