By: Mike Campbell

It has always been trite to suggest that the world is a “global village”, but like many such ideas, there is at least a grain of truth in it. Many corporations are multinationals, either formed by strategic partnerships or through the creation of subsidiaries abroad. These entities are at the whim of fortune in the countries in which they operate: consider that flooding in Thailand is harming productivity in Japan since it has disrupted the supply chain for home-based manufacture.

In the financial world, many of the larger banking houses have operations overseas and almost all of them will be invested in financial products and markets overseas. This explains why the Greek financial crisis has hit French banking stocks – the French banks invested in Greek bonds, so if the Greeks default, it is French investors who will be carrying the can (to a certain extent). As a strategy for risk management, diversification has its appeal, but inevitably the approach exposes one to a greater spread of (potential) risk.

America has always enjoyed close economic and political ties to Europe (two World wars notwithstanding!) and there has always been substantial mutual investment. This means that the Eurozone crisis is not just a local affair. As if any confirmation of this was actually needed, Fitch’s ratings agency has just issued a warning about US banking exposure to Eurozone debt. Naturally, this has been enough to send banking stocks lower in the USA: Morgan Stanley saw 8% hacked off its value, JP Morgan and Bank of America saw 3.8% disappear from their stock values. This situation should hardly have come as a shock to anybody interested in the stock market who had done the slightest bit of due diligence, but the markets tend to react on perception rather than logic. Financial sector stocks will become too tempting to investors before long and much of the losses will surely be recouped – but as this story has a long way to go yet, financial sector stocks will probably head lower still before rebounding. In investing, as in so much else in life, its all about timing.