Question

Globalization is supposed to provide diversification benefits that domestic sectors in US can not. Find three examples where foreign events led to major set-backs in US stock markets and Discuss why those events affected the US markets.

Answer 1

Globalisation provides with a benefit of investing into the foreign economy in order to have advantage in regards to diversification because it will be providing hedging with foreign exchange fluctuations and other geo political events because the investment is made outside the domestic territory.

when an investor is investing into the United States domestic economy, it will mean that he is only having diversification benefits regarding United States economy and he will have no control over the global events that he cannot help himself from any of the risk arising out of the global event so he would be wanting to invest into the global stock in order to maximize the benefits in relation to diversification with foreign stocks and he will be likely to getting himself hedged against any kind of foreign exchange difference because he is in western into foreign stocks.

Three example where foreign events led to major setback in United States stock markets will be as follows-

A. Recent coronavirus can be said to be a foreign event because the origination of coronavirus was from Chinese Market & it triggered the entire global economy due to its contagious nature.

B. When there was an Asian crisis, then United States economy also corrected in fear of global recession in 1997 because experts were predicting that emerging markets are going to go bust and it will also affect the developed market as well because they have a lot of investment into the emerging markets as the entire global economy is interconnected

C. When there was a Brexit in British economy, it also led to effect on the United States market because Brexit has triggered a global meltdown as people were feeling that Euro will be losing its steam and European countries will be losing on the majority of the shares and United Kingdom will also have to find its own ground so they were very sceptical of immediate recovery and it was reflective in various economy including United States economy.