These days, we have been hearing a significant amount of news out of Ukraine. "Pro-Russian troops" are now in control of the security and administrative systems in the Crimea region, which is the mainly Russian-speaking area of the country. World leaders are saying that this is nothing but an act of aggression by Russia, saying that at the very least, the situation is worsening each day and it's very unpredictable what could happen next.
As a result of the uncertainty, key stock indices here in the U.S. are sliding lower—mind you, the Ukraine is neither a major trading partner with the U.S. nor is it a country in which a lot of American-based companies operate. Considering this, one must wonder why key stock indices are seeing selling then at all.
Here's what investors really need to know…
At the very core, it all comes down to this: the Ukraine/Russia issue is a problem for the global economy, with which the key stock indices are highly correlated. If the global economy as a whole faces an issue, then the key stock indices slide lower. This is something investors have to keep in mind.
Ukraine is just one of the issues for the global economy that we see in the news; there are others, which investors need to know about, that may have even more gruesome consequences on the key stock indices than now.
For example, the Chinese economy isn't getting much attention these days, but we see manufacturing activity in the country is continuously declining. This shows that the demand is slowing down and it will impact the bottom-line of companies on the key stock indices that have major business operations in the country. The Chinese economy looks to be heading towards an economic slowdown.
But China isn't the only place in the global economy investors should keep in mind when trying to figure out where key stock indices will go; South America is another region.
For instance, the central bank of Brazil raised its benchmark interest rates from 10.50% to 10.75%. This is mainly because inflation in the country is getting out-of-hand and the economy is showing signs of severe stress—and it could be on the brink of a recession. (Source: Trevisani, P., "Brazil's Central Bank Raises Interest Rate to 10.75%," Wall Street Journal, February 26, 2014.)
In a situation like the one we currently have, when the global economy is threatening the performance of key stock indices, investors have to be really careful in what they do.
The first step they should take is to see if their holdings are impacted by the problems. Take the current Ukraine/Russia situation, for example. Investors should ask themselves do the companies they own have major assets and market share in the country? If this isn't the case, investors shouldn't worry too much about the key stock indices falling. If anything, this is a great opportunity for investors to add to companies that they believe offer long-term growth.
If the companies they own in their portfolio have businesses in troubled countries, the best and most secure move would be to sell. By selling their holdings, investors save their portfolio from future losses if there are any, while building up some cash that they can use to buy other companies with better potential.
As I said earlier, what events like those occurring in the Ukraine do is create uncertainty in the global economy. Investors may do well by buying gold-related investments to profit. Gold has proven to be one of the best hedges in times of uncertainty; therefore, gold-related investments will do well in this kind of environment.
This article Can This Precious Metal Save Your Portfolio from the Rising Tensions in Crimea? by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter.