The Big Picture for Investors Is Global in Size
Many foreign stock markets have shown surprisingly small reactions to Wall Street’s recent turbulence--a good reminder of the benefits of international investment diversification.
While the Dow Jones industrial average has fallen 5.2% since Nov. 14, including the 120-point plunge on Nov. 15, the Hong Kong stock market has actually risen 0.8% in that period, as measured by the blue chip Hang Seng index.
How a few other key markets fared:
* German stocks have barely budged. The Frankfurt market’s DAX index was off just 1.3% between Nov. 14 and last Friday.
* Australian stocks have also held up surprisingly well, with the Sydney exchange’s All Ordinaries index off 1.6% in the period.
* Meanwhile, the Tokyo market dropped 4.4%, which, though steep, still was less than the Dow’s loss.
Though the United States remains vitally important in the global scheme of things, the impact of economic weakness here on other countries isn’t the same as it was even 10 years ago, many experts point out. That’s largely a result of the rapid development of intra-Asian and intra-European trade in recent years.
Thus, many foreign companies can show healthy earnings gains regardless of weak growth in America. And that can translate into higher stock prices abroad.
“All of these markets don’t move in lock-step” anymore, says Jeffrey Russell, who manages the $41-million Fenimore International Fund in New York.
The Fenimore fund, a branch of brokerage Smith Barney, Harris Upham & Co., has been the best-performing of all international stock mutual funds this year, with a 33.5% gain through mid-November, according to fund-tracker Lipper Analytical Services Inc.
In contrast, the average international fund was up 12% through mid-November, far below the average U.S. stock fund’s 29.5% rise.
The major culprit in the typical foreign fund’s weak results was the strong rise in the dollar earlier in the year. A rising dollar reduces the value of foreign stocks when they are converted from native currencies to dollars for American investors.
Many international stock funds have also been hurt this year by their large stock holdings in the Japanese market, which has suffered through scandals and a general malaise lingering from Tokyo’s 1990 market crash, when the Nikkei stock index lost 39%.
Though the Fenimore fund now has 11.7% of its assets in Japan, the fund’s Japanese stocks have mostly been winners this year despite the Tokyo market’s overall slide. “We focus on bottoms-up stock-picking,” Russell says, which means trying to find the best companies around the globe at any moment, rather than keeping large positions in key foreign markets simply because those markets are bigger than others (as in Japan’s case).
That bottoms-up approach also drew Fenimore to the Mexican stock market in recent years. About 23% of the fund’s assets now are in Mexican stocks, and that market’s huge gain this year has been largely responsible for Fenimore’s No. 1 performance ranking.
Russell believes that the Mexican stock story still is an exciting one, though he figures that share prices there already fully reflect the good news of the economy’s turnaround and the democratization of the political system.
“What’s going to continue to drive stocks prices in Mexico in the future is earnings growth,” Russell says. His major holdings there included Cemex, the cement giant, and retailer Cifra.
Among other markets where Fenimore owns stocks, or plans to buy:
* Hong Kong, 4.3% of the portfolio, still looks good, Russell says. “We like Hong Kong Telecom, which is a nice steady growth company.”
* South Korea, which will allow foreigners to directly buy shares there starting Jan. 1, “intrigues us. . . . There are still some domestic stocks there selling for just three to six times earnings per share,” Russell says.
* Singapore, 2.2% of the fund, is home to Jurong Shipyard, a company that Russell says exemplifies Fenimore’s investment discipline. The company repairs oil tankers, which has become a booming business because building new tankers is prohibitively expensive.
Russell expects Jurong’s earnings to grow 15% to 20% a year. Yet many American investors would probably shy away from this business on first glance, equating it with other low-tech, low-return businesses in the United States.
Point is, Russell says, “just because it’s a doggie business in the U.S. doesn’t mean it can’t be a fantastic business in foreign countries.” As the global economy expands, such divergences will be more commonplace--and so will the divergences between the U.S. and foreign stock markets.
What About 1992?Though Russell naturally is optimistic about making money in foreign stocks next year, he admits that “it’s going to be tough to have as big a year” as Fenimore is having this year.
Still, given that U.S. stocks now account for just 40% of the total capitalization of all markets worldwide, that leaves 60% of the opportunities outside our borders--a bigger shooting gallery for a fund manager than our own market.
Russell and other foreign-stock fund managers say that if the U.S. can avoid another outright recession--and just keep muddling through with anemic growth--demand here should provide enough of an underpinning to help keep many foreign economies growing at decent rates.
David Testa, chairman of the Baltimore-based T. Rowe Price International Stock fund (up 15% year-to-date through mid-November) figures that “on balance, you’ll see foreign markets move moderately higher in 1992. You’re at that stage where interest rates are likely to be coming down (globally), and many troubled economies are bottoming.”
But he also warns that “if we’re really turning down hard in the U.S. economy, you’ll see a broad negative response” in foreign stocks as well, because America remains the principal importer of goods in the world.
In any case, Testa believes that European stock markets will prove more interesting than Asian markets next year, in part because of the unfolding of the European free-trade pact that officially takes effect on Jan. 1. Though many of the steps toward free European trade have already been phased in, Testa says investors may now be too blase about the potential benefits of the ’92 pact next year.
Meanwhile, foreign-fund managers point out that the dollar’s weakness is a plus for them. As noted earlier, the rising dollar hurt many foreign funds early this year. If the latest dollar slide continues in 1992--which seems increasingly likely, with U.S. interest rates dropping--it will boost the value of foreign stocks held by Americans.
How big a difference do the dollar’s fluctuations make when you’re investing overseas? The Swiss stock market is up 21% this year, measured in francs. But because the dollar has risen from 1.28 francs early in the year to 1.42 francs now (though it has fallen back from 1.56 francs last summer), that 21% Swiss stock gain is worth just 10% to a U.S. investor.
A falling dollar in 1992 would have the opposite effect, giving U.S. investors a “bonus” return over whatever stocks earn in local currencies.
Stock Troubles: Not a Global Event Foreign stock markets followed the U.S. market lower after the Nov. 15 Dow Jones plunge of 120-points, but some markets quickly regained their footing even as the U.S. market weakened further last week.
Friday Pct. change, Pct. change Market/index close Nov. 15-22 year-to-date Hong Kong/Hang Seng 4,243.07 +0.8% +40.3% Germany/DAX 1,600.26 -1.3% +14.5% Singapore/Straits Times 1,456.02 -1.3% +26.1% Australia/All Ordinaries 1,643.10 -1.6% +28.4% Britain/FTSE 2,446.30 -4.3% +14.1% Japan/Nikkei 23,117.39 -4.4% -3.1% U.S./Dow industrials 2,902.73 -5.2% +10.2% Mexico/Bolsa 1,376.22 -5.7% +118.9% France/CAC 1,741.28 -6.8% +14.7%
