Doesn’t Pay to Ignore Foreign Stocks
Bargain hunters are jumping back into the U.S. stock market, believing that the persian Gulf crisis is all but over. But what’s a bigger bargain at this point: the Standard & Poor’s 500 index, now off just 6.9% year to date--or stocks in France, Germany, Singapore and a host of other foreign markets, all off 15% or more on average?
If you still haven’t diversified into foreign stocks, now’s a good time to start planning that move. Many overseas markets dramatically outperformed the U.S. stock market in the 1980s. In the 1990s, history may not repeat exactly, but there’s little question that many foreign economies will grow much faster than ours. Keep your money only in the United States and you risk missing some exceptional opportunities in foreign stocks.
The easiest way to invest overseas is through mutual funds that target foreign stocks. That way, you leave the driving to professionals. Right now, those pros are scanning depressed overseas markets for some hint that the slide is mostly over. There’s still plenty of caution.
“This has been one of the worst years for international markets in the last 20 years,” laments Nancy Langwiser, who manages the $82-million Lifetime Global Equity fund, a Boston-based fund that’s part of Massachusetts Financial Services.
The problems overseas are no different from what U.S. markets have faced, Langwiser notes: Rising inflation, higher interest rates, deteriorating corporate earnings and worries about Iraq. Foreign stocks have suffered worse than U.S. stocks, partly because foreign markets are smaller, less liquid and thus more volatile, she says.
Langwiser has been conservative all year--which kept her fund to a net drop of just 5% this year through Nov. 29. The fund is 30% in cash, a huge safety cushion. But now, as she looks at battered foreign stocks, she says, “I think values are beginning to emerge, though there’s still a lot of risk.” Her heaviest positions outside the United States, by percentage of fund assets: 14% in British stocks, 10% in Dutch and 8% in German issues.
Sheila Coco, who runs the $84-million FT International Trust foreign stock fund in New York, also is beginning to feel more positive, particularly about Britain. Inflation has leaped to double digits there, but Coco sees the rate coming down in 1991. Once the turn is apparent, it will be enough to rejuvenate British stocks, she says.
No market needs more rejuvenating than Japan’s: The Nikkei index has plunged 42% this year, and Tokyo stocks have come under renewed pressure in recent weeks. They look cheap, but John Hickling, who took over Fidelity Investments’ $80-million Pacific Basin Fund in Boston last April, looks at Japan and remembers what retired Fidelity legend Peter Lynch used to warn: “Don’t confuse price with value.”
Hickling inherited a 50% Japanese stock weighting in the Pacific Basin Fund, which is a major reason the fund was off 26% this year through Nov. 29. Even at today’s prices, Japanese stocks don’t yet look like a good bet for new money, Hickling says. Inflation continues to rise in Japan, pressured by wage increases stemming from that nation’s labor shortage.
“The fact that Japan is down more than other markets doesn’t make a difference to me. It was more overvalued than most,” Hickling says.
The same applies to Thailand’s market, which was one of the best performers in 1989 but took a hard hit earlier this year, Hickling says. Yet, he adds, Thai stocks “are getting closer” to value levels now, selling for 12 to 13 times earnings, on average. In Australia, too, “I think we’re getting closer to the bottom,” he says. “They’re already in a recession . . . and speculation has been wrung out of their financial system.”
Hong Kong, meanwhile, still looks great to Hickling. It’s one of the few markets that is up for the year, and Hickling has a 15% weighting there. “When you talk about cheap stocks, it’s at the top of the list for low price-to-earnings ratios and attractive yields,” he says.
Even if foreign markets roar back to life in 1991, any investors legitimately wonder if those stocks can do as well in this decade as they did in the 1980s. The average global stock mutual fund gained 246% in the 10 years ended Sept. 30, according to fund tracker Lipper Analytical Services. The average U.S. stock fund rose 207%.
One kicker in the ‘80s was the decline of the dollar, which automatically boosted the value of foreign stock holdings of American investors. Many fund managers admit it’s unlikely that the dollar will provide that kind of bonus in the ‘90s. And if the dollar reverses course and rises in value, American investors in foreign stocks could see their holdings erode in value.
Should you just stay home with your dollars? John Templeton, the head of Templeton Mutual Funds and one of the deans of international stock investing, recently told a group of analysts in New York that American stocks “may be better bargains than usual” now versus foreign stocks precisely because American stocks lagged their foreign peers in the 1980s.
Still, American investors who don’t keep some part of their portfolio overseas probably will regret it over the long term. Lifetime Global Equity’s Langwiser notes that one key attraction for American stock pickers is that many young foreign markets “are much more inefficient than the U.S. market.” In other words, the stock prices often don’t accurately reflect their companies’ prospects, because stock investing is a relatively new game in many countries.
Hickling, for example, says he finds some great values in Japanese convertible bonds (which convert to stock at a preset price) because that market is “underdeveloped and misunderstood in Japan.”
But the best reason to invest overseas in the ‘90s is simply that, in a world where capitalism is blossoming, America has less of a monopoly than ever on good business ideas. Ignoring foreign stocks is like selling the world short.
YOU THINK WE’VE GOT IT BAD? Foreign stocks have performed far worse, on average, than the U.S. market this year--which could mean that if you’re in the mood to bargain-hunt, overseas investments could be a better place to look.
Pct. Index/country Dec. 31 Thurs. change Hang Seng/Hong Kong 2,836.60 3,105.00 +9.5% S&P; 500/U.S. 353.40 329.92 -6.6% FTSE 100/Britain 2,422.70 2,152.60 -11.1% CAC 40/France 2,001.08 1,660.44 -17.0% DAX 30/Germany 1,790.37 1,470.96 -17.8% TSE 300/Canada 3,969.80 3,226.60 -18.7% All Ord./Australia 1,649.00 1,317.00 -20.1% Straits Times/ Singapore 1,481.30 1,138.32 -23.2% Nikkei 225/Japan 38,915.90 22,372.58 -42.5%
