SPECIAL REPORT: INVESTING IN THE ‘90s : FOREIGN STOCKS : Take a Global View For a Higher Payoff
Investing in foreign stock mutual funds may be the easiest decision you can make in 1993--especially if it’s a move you’ve delayed the last few years.
While the U.S. stock market is near its all-time high, European and Japanese stocks remain mostly well below their peaks, the result of high interest rates and the anemic state of their economies.
So if you’ve been afraid of overpaying for U.S. stocks, many foreign stocks offer a cheaper way to bet that the global economy will look far better by the late-’90s.
In addition, most developing nations in Asia and Latin America--Thailand, Malaysia and Chile, for example--already are growing at rates far ahead of what the mature U.S. economy can achieve.
By definition, the faster a nation’s economy advances, the greater the growth opportunities for companies in that economy.
If you need a final reason to bet on foreign stocks today, how about a “contrarian” view: U.S. investors who’ve taken this advice since 1989 have mostly regretted it, as foreign market returns until recently have been abysmal this decade.
Thus, there’s still plenty of disbelief among Americans that foreign investing is worth the effort. And in markets, skepticism often means opportunity--eventually.
“Over the last four to five years, most Americans were better off sticking to U.S. stocks than diversifying internationally,” admits Jean-Marie Eveillard, manager of the $700-million SoGen International stock fund in New York.
Japan, of course, has been in a three-year bear market, and Europe has been dealing with the huge economic cost of the fall of communism. And while the “emerging markets” of developing nations have produced healthy returns since 1989, most international stock mutual funds hold only small pieces of those markets. So individual investors who own the funds have seen limited gains from new markets.
What’s more, the dollar’s value has fluctuated wildly against many foreign currencies since 1989. Each time the dollar rises, it shrinks the investment Americans have in foreign stocks, as those shares are worth less when translated from their weaker foreign currencies into dollars.
If all of this makes you happy to just stay in your own back yard, many Wall Streeters say you’re making a mistake.
It’s a simple fact that the United States doesn’t dominate the world economy as it once did. To ignore the rest of the world’s stock markets in the ‘90s would be akin to a Californian deciding to invest only in California companies.
“Globally, capital is increasingly being freed to seek the highest returns,” notes Bill Wilby, manager of the $1.2-billion Oppenheimer Global stock mutual fund in New York. As money flows more easily, it will naturally gravitate toward the fastest-growing economies. And it will land in stocks.
But where? Tempting stock plays abound:
* In Thailand, Wilby has scored this year with Advanced Information Services, a 3-year-old cellular phone company. Cellular use there is booming because the country’s conventional phone system is so poor.
* In America, nobody gets excited about beer sales anymore; they’re actually falling year to year. But in Chile, brewer Compania Cervecerias’ sales are growing 20% annually, Wilby says. Small wonder that Compania’s stock is near its record high--while American beer king Anheuser-Busch’s shares are at a two-year low.
Yet advisers caution against taking too much risk by concentrating foreign investment in a few hot, young economies such as Thailand or Mexico, whether through individual stocks or single-country mutual funds. Emerging markets can be exceptionally volatile over very short time spans--especially when there are political problems.
“If you’re late buying some of these (after a run-up), you might be sorry,” warns Eveillard. The South Korean market, he notes, has actually fallen 10% since 1988.
That’s why the global mutual fund is perfect for individuals. You get the benefits of foreign market growth while leaving the specific stock decisions to professionals. Plus, the diversification of a fund protects you from individual-country disasters.
Because mutual funds make it as easy to invest in foreign markets as in the U.S. market--there are more than 260 international funds--small investors have almost unlimited opportunity to diversify globally.
If you make that move, what share of your portfolio should be invested internationally?
Most financial advisers recommend 15% to 25%; if you’re just starting out, build to that level gradually.
A simple approach is to ask a few fund companies for information on their largest global funds. Look over what they own, compare performance, and make a choice or two.
In the long run, what you’re also buying in foreign stocks is a hedge against unexpected problems in the U.S. economy. History shows that foreign and U.S. markets frequently don’t correlate--that is, one often is going up while the other is going down.
“Foreign funds provide a wonderful rounding-out tool for your portfolio,” says Don Phillips, a principal at mutual fund tracker Morningstar Inc. in Chicago.
Beyond the Border
Because many of the world’s developing nations are growing at a much faster clip than the mature American economy, their home-grown companies have greater growth potential than many U.S. companies. On average, these emerging markets have sharply outpaced U.S. stocks over the past five years, although there have also been major disappointments.
Market 5-year change* Mexico +865% Chile +384% Philippines +237% Indonesia +220% Thailand +130% Brazil +85% U.S. +76% Taiwan -48% South Korea -10%
* For period ending March 31. Results measure change in price only (not dividends).
Source: Morgan Stanley Capital International
