Investors who got sold on the merits of foreign stocks a year ago probably wish they hadn't been.
Most foreign stock markets badly lagged the U.S. market in 1991, victims mainly of slowing economic growth and high interest rates abroad. A strong dollar added insult to injury.
But in 1992, many global money managers see greater potential in foreign stocks than in U.S. stocks--if only because the laggard markets now have some catching up to do.
"At the beginning of 1991, about 55% to 60% of the stock names on our 'bargain' list were U.S. companies," says Mark Howlowesko, research chief for the Templeton mutual funds in Nassau, Bahamas. "Now, only 40% to 45% of the bargain names are in the U.S."
Indeed, the sharp rise in American stocks last year has left many trading at prices that global portfolio managers don't want to pay--at least, not when they can find better deals in the rest of the world.
The dollar remains a wild card, of course. If its recent decline continues, it will produce a "bonus" return for American owners of foreign stocks by artificially boosting their value. The flip side is that a new surge in the dollar would again clip foreign stock gains.
But many global-stock mutual fund managers say investors shouldn't lose sleep over the dollar's short-term moves. Ultimately, good value in foreign stocks will reward investors, and the dollar's ups and downs won't matter, the pros insist.
Here's a look at how some global-stock mutual fund managers have positioned their portfolios for 1992:
* Templeton's Howlowesko: His company's funds, including Templeton Global Opportunity, Templeton World and Templeton Value, were among the best performers last year of 54 global stock funds tracked by Lipper Analytical Services. Most of the Templeton funds rose more than 20% for the year, compared to an estimated 14% rise for the average global fund.
Howlowesko, tutored under legendary stock-picker John Templeton, says the idea isn't to pick winners among foreign markets , but rather to hunt for stocks that are good values in whatever world market they can be found. In 1991, airline stocks were a good example, he says: The Templeton funds made big profits in such names as AMR Corp. (parent of American Airlines), British Air and Singapore Air.
Now, Howlowesko says, he's finding excellent values among smaller companies in Europe. He also remains bullish on Hong Kong, last year's hottest major market. "We still see bargains there," he says, including Sime-Darby H. K., which owns the Caterpillar heavy-equipment franchise for all of China.
* Bill Wilby, Oppenheimer Global Fund, New York: Wilby's $1.1-billion fund rose more than 20% last year, by preliminary estimates. Oppenheimer avoided the disasters that befell many global funds that kept too large a portion of their assets in Japan, the weakest major market of '91.
In 1992, Wilby says, "we think Europe is the place to be. We see rapid economic growth there, and yet stock valuations are half of what they are elsewhere."
Germany, in particular, should be "one of the world's oases of growth" this year, he says. Though the German central bank recently raised short-term interest rates, Wilby believes that was the last rate boost, and "the next move will be down." That should finally boost German stocks, which on average sell for just 15 times their 1991 earnings per share, versus 21 times or more for the average American stock, he says.
* Michael Gerding, Founders Worldwide Growth Fund, Denver: The $20-million Founders fund soared more than 25% in 1991, helped by strong gains in its U.S. stocks (24% of the portfolio) and heavy ownership of stocks in some of the fastest-rising Latin American and Asian markets.
This year, France appears to be a great bargain, Gerding says. Assuming that German interest rates drop, the French economy will benefit because French rates are tied to German rates, he says. "We see a lot of unique opportunities in France," Gerding says, including Euro-Disney (the new park, outside Paris, opens in April) and BSN, a consumer-products giant whose brands include Dannon yogurt.
Japan, meanwhile, still looks like a loser to Gerding. "There are fairly serious financial concerns there that will make it very difficult for that market to move up," he says--including slowing domestic growth, falling corporate profits and weakening banks. All that, plus Japanese stocks still sell for some of the highest price-to-earnings ratios in the world--30 times or more.
World Stocks in '91
Here are approximate returns of key stock markets in 1991, measured in native currencies and in U.S. dollars adjusted for currency fluctuations. Dollar-adjusted figures are what U.S. investors would have earned.
1991 pct. change: Market Native U.S. dollars Hong Kong +40.0% +40.4% Australia +26.4% +24.8% United States +23.8% +23.8% Singapore/Malaysia +13.1% +20.9% France +14.8% +13.2% Britain +12.2% +9.2% Spain +8.8% +7.9% Germany +7.0% +5.9% Canada +5.3% +5.2% Japan -3.1% +4.8%
Figures through Dec. 26.
Source: Morgan Stanley Capital
For information on funds discussed above, here are toll-free phone numbers: Templeton, 800-237-0738; Oppenheimer, 800-525-7048; Founders, 800-525-2440.