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 Say Goodbye to Your Free Lunch

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Number of posts : 440
Registration date : 2007-07-01

PostSubject: Say Goodbye to Your Free Lunch   Fri Aug 31, 2007 9:49 pm

Say Goodbye to Your Free Lunch

By Todd Wenning
August 31, 2007

"When America sneezes, Europe catches the cold."
Legend has it that this saying originated after the Wall Street
Crash of 1929; the U.S. crash sent many European economies into even
larger depressions than our own.
But if the events of Feb. 27, 2007, told us anything, it's that
America isn't the only market capable of spreading an economic cold
anymore. The 9% drop in the Chinese market that Tuesday prompted a near
4% drop in the S&P 500; the U.K. FTSE 100 fell 2%, and the Indian
BSE slid 4%.
Even smaller global events have had major impacts on the markets.
Just three years ago, an uprising in Nigeria sent oil prices over $50
for the first time and roiled the global markets for a few days.
The development toward highly correlated global markets has become a
reality in a very short period of time. According to a recent article
in The Economist, international markets have revealed a 95%
correlation with the S&P 500 -- this figure once sat as low as 40%
in the mid-1990s!
In other words, the global markets are dancing in step more than
ever before, so while adding international stocks to your portfolio can
still lead to big returns, the days of getting a "free lunch" from international diversity may be coming to an end.

Why this is a good thing

The Economist
cites various phenomena that are contributing to converging global
markets. Among them: reduced controls on capital, a larger number of
cross-border listings, and multinational mergers.
In just the past few months alone, some of the world's biggest stock
exchanges have announced agreements or mergers to integrate trading
systems. Back in April, NYSE Group merged with European market Euronext
to create what is now NYSE Euronext (NYSE: NYX).
The European Union's internal market commissioner, Charlie McCreevy,
said that the NYSE/Euronext union marks the beginning of stock market
mergers and "at some point we will see moves toward a common pool of
Furthermore, many companies are listed in multiple global markets in
order to gain access to foreign capital. Just as some foreign companies
appear on U.S. exchanges -- like China Life Insurance (NYSE: LFC) and Brazil's Companhia Vale do Rio Doce (NYSE: RIO) -- U.S. companies such as NVIDIA (Nasdaq: NVDA) and Amgen (Nasdaq: AMGN) are listed on the Frankfurt and London exchanges.
Finally, a few major international mergers have taken place in the past five years, including Alcatel-Lucent (NYSE: ALU) and Arcelor Mittal (NYSE: MT).
The effects of such unions increase global market correlation because
the newly formed companies are known in multiple countries and generate
revenues in multiple markets.

You can still profit
These signs seem to
point toward one global stock market, where an investor can trade any
stock from anywhere in the world at any time. Even though the "free
lunch" benefits of international diversification dwindles as this
becomes a reality, the growth potential of international stocks remains promising, particularly in emerging markets such as Mexico, Taiwan, and Chile.
The secret is finding these companies early in their growth stages. Early investors in Chinese wireless community,
for instance, have seen their shares appreciate 7,600% since March
2002. The thing is, NetEase's rise wasn't a miracle -- it showed the
signs of a strong, promising company in 2002. With a founder/CEO with
significant ownership at the helm, a strong balance sheet, and a wide
market opportunity, NetEase was well positioned for growth.
Need some help finding a few good international stocks? Fool senior analyst Bill Mann and the Motley Fool Global Gains
team are a great resource -- they take the time to explain the
intricacies of the global markets and teach you what to look for and
what to avoid.
You can see all of their past recommendations and receive two new stock ideas each month with a free 30-day trial to Global Gains. Simply click here to take advantage of our offer. There is no obligation to subscribe.

This article was originally published on March 30, 2007. It has been updated.

Fool contributor [email]Todd Wenning[/email] wholeheartedly recommends Empire Records to any serious fan of '90s movies. He does not own any shares mentioned in this article. NVIDIA is a Motley Fool Stock Advisor pick. NYSE Euronext and NetEase are Rule Breakers choices. The Fool's disclosure policy can't wait for Rex Manning Day.
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