Foreigners Taking Bigger Stake in Stocks
A big reason why the U.S. stock market has done so well in recent years is simply that there are so many American stock investors.
From investment clubs to 401(k) plans to mutual funds, this country has no shortage of organizations, regulations and vehicles that encourage people to take a stake in stocks. America is probably the most investor-friendly nation on earth, and its market ranks as the world’s largest.
Even so, other countries are likely to narrow the gap in the years ahead. Many foreign nations are taking steps to cultivate their own pro-stock policies and attitudes, particularly in the area of retirement-plan reforms.
“There’s a secular trend to greater equity ownership everywhere in the world,” says Dan Blanks, director of international investments at Fidelity Management Trust Co. in Boston.
Why should American mutual-fund shareholders care?
Because it implies heightened demand and thus higher prices for foreign stocks over time. Also, it would result in broader, more liquid markets around the globe, and more efficient ways for foreign companies to raise cash. That could boost economic growth.
All of these factors would benefit Americans who own shares in international and global mutual funds, which have posted lackluster returns in recent years.
The trend toward broader investment in stock markets can be seen in both developed and emerging economies.
In Germany, for example, individual investors as well as pension managers are beginning to realize that it makes sense to invest more of their portfolios in stocks. Under the traditional German pension structure, companies pay retirement benefits to workers out of operating reserves rather than setting aside money in separate investment accounts.
Germany has an even grayer population than our own, which means employers and workers will need to harness the growth potential of diversified stock portfolios to meet anticipated retirement needs in the next century.
“Germany is one of several industrialized nations with greater demographic pressures [than the U.S.] but without our big, private-pension system,” says Craig Ueland, managing director of international operations for Frank Russell Co. in Tacoma, Wash. To play catch-up, Germany and other graying nations increasingly will need to turn to stock investments, he believes.
To that end, Deutsche Bank, a high-profile institution, recently announced it would boost its investment for employee retirement benefits in stock and other pension vehicles by $325 million over two years.
“If this becomes a trend, it will mean billions of dollars will move into the financial markets,” writes the No-Load Fund Analyst newsletter in San Francisco. “This could be a boon for stock and bond markets . . . [and] a positive for economic growth.”
Certain other countries are taking more tangible steps. A few years ago, Singapore liberalized its Central Provident Fund, a mandatory retirement account to which both workers and employers must contribute. The changes allow citizens of the city-state to invest a portion of their retirement accounts in Singapore’s stock market.
“This has provided a significant inflow for the market,” says Chip Wendler, a vice president in the international-investing arm of fund group T. Rowe Price in Baltimore.
Hong Kong politicians are moving to create a similar retirement program in the British colony before it reverts to Chinese control next July. Although final details haven’t been ironed out, approval is deemed likely. The system probably will be a mandatory savings program that funnels investor contributions into Hong Kong and Chinese stocks, Wendler predicts.
In Japan, where pension-fund assets have been restricted largely to yen-denominated bonds and real estate, the government relaxed its guidelines last year to allow pension managers to divert more money into stocks.
But Japan still has a way to go to encourage broader stock ownership by pension funds and individuals--a situation that hasn’t been helped by the country’s six-year bear market.
Even Latin America has a model for expanded stock ownership. Chile, which had allowed its residents to stash 30% of their pension savings in local stocks, boosted that to 37% last year, Wendler says.
The country’s investor-friendly policies paid dividends in the wake of the Mexican peso devaluation in late 1994 and early 1995. That trauma wreaked havoc on stock prices throughout Latin America but not in Chile, where the market was dominated by local investors who stayed put, not foreigners who sold out.
“It’s almost a given that the Chilean model will be followed” in Latin America, Wendler says.
The Investment Company Institute of Washington, D.C., estimates that just one person in 200 in Latin America owns a mutual fund, compared with one in three U.S. citizens.
As foreign investors develop more enthusiasm for their own stock markets, they will also become more interested in U.S. companies, to the benefit of Americans who own domestic mutual funds.
“A number of these countries have small stock markets, so many foreigners will seek to diversify outside their own borders,” Ueland says.
Just as Americans have been learning about the importance of diversifying into non-U.S. stocks, those lessons will be repeated, in reverse, around the globe.
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A Boost for Foreign Funds
Many foreign nations are taking steps to encourage their citizens to invest in stocks, which may be good news for Americans who invest in international mutual funds. Broader participation by foreigners in their own stock markets will probably result in greater market liquidity, as well as heightened demand and thus higher prices for shares of non-U.S. companies. That could boost international mutual-fund portolios, which have achieved lackluster results in recent years. Here is a year-by-year tally:
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Year Average U.S. Average stock fund international fund 1990 -6.27% -11.95% 1991 +35.57 +12.37 1992 +8.88 -5.05 1993 +12.54 +39.40 1994 -1.67 -0.71 1995 +31.07 +9.41 1996* +10.84 +8.02
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* 6 months
Source: Lipper Analytical Services
