What You Need to Know to Protect Yourself from the Global Economic Slowdown
The global economy is showing traits that shouldn’t go unnoticed by investors. Instead, investors should keep a close eye on their portfolio and make sure they are managing their risk properly by not being overexposed to a certain region, having their assets allocated in different asset classes, and having stop orders in place for their doubtful positions.
Investors need to know that companies trading on the key stock indices have exposure to the global economy; this means their stock prices can suffer.
The global economy looks to be heading towards a period of stagnant growth or an outright economic slowdown. The reason behind this notion is very simple: countries across the board in the global economy are witnessing anemic growth, and the demand is declining.
For example, consider India, one of the well-known emerging markets in the global economy. The central bank of India expects the country to grow by 5.5% in the fiscal year ending March 2014. This was lower than the central bank’s earlier forecast of 5.7%. (Source: Goyal, K., “India Central Bank Holds Rates in Push to Stem Rupee Plunge,” Bloomberg, July 30, 2013.)
In June, industrial output in the third-biggest hub in the global economy, Japan, fell 3.3% from a month earlier. This was the first time in five months that industrial output in the country fell; it had increased 1.9% in May. (Source: “RPT-Japan June industrial output falls 3.3 pct mth/mth,” Reuters, July 29, 2013.)
In addition to this, in the same month, the country’s retail sales also didn’t register as expected. Retail sales in the Japanese economy increased only 1.6%, compared to the 1.9% that was expected. (Source: Kitchen, M., “Japan retail sales bounce back in June,” MarketWatch, July 28, 2013.)
Sadly, the troubles in the global economy don’t end there; other hubs are also sending warning signs of an economic slowdown ahead, such as the Chinese economy. China is expected to grow at a very slow pace this year compared to its historical average, and the scrutiny towards its exports and manufacturing is very quickly picking up strength.
There are other nations in the global economy that are also showing signs of severe stress. The central bank of Australia has cut its interest rates seven times since 2011 to prevent an economic slowdown, but troubles continue to grow. The Australian dollar has fallen in value and the government is expected to receive less revenue this year. (Source: “Australia’s RBA Sets Stage for Another Rate Cut,” Wall Street Journal, July 30, 2013.)
Investors may be able to profit from this situation in the making by looking at exchange-traded funds (ETFs) like ProShares Short MSCI Emerging Markets (NYSEArca/EUM), which lets investors short emerging markets; this means that investors will profit as the key stock indices in the emerging markets of the global economy decline in value. Another way would be to target one country or a certain region through a short ETF like the India Fund, Inc. (The) Common S (NYSE/IFN). This strategy lets investors take advantage of and earn profit from the key stock indices in India as they slide lower.
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