A Lousy Decade Later, Foreign Stocks Lure Again

Many U.S. investors haven’t paid much attention to foreign stocks in the 1990s. Not if they were smart, anyway.

Here’s the back-of-the-envelope scorecard:

* Average total return of general U.S. stock mutual funds: 265% for the 10 years ended Sept. 30, according to Lipper Inc.

* Average total return of foreign stock funds, same period: 133%.

* Average total return of emerging-market stock funds, same period: 67%.

* Average total return of Japanese stock funds, same period: --7.6%.

Clearly, investing around the planet has been a bust compared with simply keeping your money at home in the 1990s.

But with whatever other new-millennium gazing investors might be doing these days, some folks must be wondering if the tide may finally shift in the new decade--in favor of foreign stock markets.

The numbers this year are certainly helping to turn more U.S. investors’ heads: Through last Thursday, the average foreign stock fund was up 23.7% year-to-date, and the average emerging-markets was up nearly 42%, while the average general U.S. fund gained 18.4%, according to Lipper.

Many investors playing individual foreign issues that trade in U.S. markets can vouch that the action has been even hotter than the typical foreign mutual fund’s return--if you picked the right names.

Take Japanese electronics titan Sony Corp., for example. Its New York Stock Exchange-listed shares (ticker symbol: SNE) have rocketed from $72 at the start of the year to $176.63 now, for a 145% gain, tracking the rally in the Tokyo-listed shares.

The Japanese stock market overall still is worth less than half its peak reached a decade ago. But Sony’s leadership in key electronics businesses (think: PlayStation) has made it a cult stock in Japan and worldwide all over again.

Among European issues, France Telecom (FTE on the NYSE), the phone and Internet giant, is up 46% in just the last three months, amid a new mania for telecom shares worldwide.

Closer to home, Grupo Televisa (TV), which produces and broadcasts Spanish-language programming worldwide, has helped pace the sharp advance in the Mexico City market, surging 46% just since mid-October to $53.81 on Friday on the NYSE.

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And last week, news of the landmark trade pact signed by the United States and China set off a feeding frenzy for many U.S.-traded Chinese issues.

That binge, however, arguably had little to do with true investing. Buyers were pouring into tiny China-related stocks about which they surely knew next to nothing.

(Yes, many people are buying big U.S. technology stocks that they don’t understand--but at least most of those companies are substantial businesses.)

Predictably, the China game ended in disaster for many players. China Prosperity Holdings (CPIH), a Hong Kong-based apartment-renovator that also has interests in--you guessed it--Chinese Internet ventures, saw its Nasdaq-listed shares soar from $1 on Monday to a peak of $80 on Wednesday.

By Friday the stock was back to $13.25--still a great gain if you bought at $1, but an 83% loss to the person or persons who paid $80, if they’re still in the stock.

The problem of hot money inflating foreign stocks is all too familiar to investors who took a flier on emerging-markets mutual funds in the early 1990s.

Amid dull returns in the U.S. stock market in 1993, Wall Street began to focus on expectations for burgeoning growth in emerging-market economies. The hype level was off the charts: Indonesia, Mexico, South Korea, Brazil--these all were to be the great economies, and markets, of the 1990s.

The mutual fund industry, and the media, bought in. Cash began to pour into emerging-market funds.

It was fun while it lasted: The average Pacific-region mutual fund zoomed 64% in 1993. The average Latin American fund soared 57%.

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But the party ended soon after that, as the Federal Reserve drove U.S. interest rates sharply higher and as Mexico devalued its currency late in 1994.

In mid-1997 a far bigger bomb would drop: Thailand’s currency devaluation, which set off the devastating East Asian financial crisis.

By the end of 1998, investors in the average emerging-markets fund had lost a stunning 41% of their money if they had stayed put since early 1994.

So despite this year’s rebound in many emerging markets coupled with the Japanese market’s gains and strength in most European markets as well, U.S. investors can be forgiven for wondering if this is just another fake-out.

But on Wall Street, some high-powered investment strategists are advising clients to make a long-term bet on foreign stocks now.

Charles Clough, chief investment strategist at Merrill Lynch & Co. in New York, has been overly bearish on the U.S. stock market in 1999, but he was bullish on Japan from the start of the year, and on that he has been right.

Clough now favors foreign markets in general over the U.S. market, which he worries faces too many threats with share prices at record highs after a tremendous five-year run.

This year, “global [markets] are substantially outperforming the U.S., and we think that will continue for a few years,” Clough says. “We like Asia and Japan first, and Europe including emerging-Europe second.”

For many global investors, the basic appeal of non-U.S. stocks is rooted in the assumption that economic growth is beginning to accelerate in most areas of the world after the recessions, depressions or sluggish growth virtually everywhere outside the United States in recent years.

Goldman Sachs & Co., in a new report on emerging economies, argues that “while still subject to considerable uncertainties, there are good reasons to believe that the outlook for emerging economies will improve considerably in 2000, bringing with it investment opportunities.”

In Europe, meanwhile, the dominant theme is that investors there, and companies, are on track to duplicate the U.S. model of the 1990s: a growing equity culture among average investors, a growing focus by corporate managers on shareholder value, and an accelerating drive to consolidate (i.e., takeover mania).

“Europe seems a very good relative bet to us,” says Paul W. Miller, a money manager at J.P. Morgan & Co. in Los Angeles.

As for Japan, the banking system remains weak, domestic consumer demand remains uninspired, and the demographic picture--an aging population--still gives some U.S. investors pause about the stock market’s long-term prospects.

But this year, for the first time since the Japanese economic crisis began 10 years ago, major Japanese companies finally appear serious about restructuring, cutting costs and repositioning themselves for growth.

So what? some U.S. investors may well ask. While a great case may be made for foreign investing now, who’s to say that, however well foreign firms may perform, U.S. companies won’t perform even better?

To put it another way: There is no law that says the U.S. economy, and U.S. market, can’t continue to produce stellar returns relative to foreign competitors over the next 10 years.

Another caveat: Investors who take the time to dig will see that price-to-earnings ratios and other valuation measures aren’t much cheaper (if at all) in many foreign markets than in the U.S. market.

Also, remember the currency risk: Fluctuations in the dollar’s value relative to other currencies can directly help, or hurt, your foreign-equity returns. This year, the strong yen is boosting returns for U.S. investors in Japanese stocks, while the weak euro has slashed returns on European stocks.

Finally, there is the Y2K-bug risk: Who knows whether foreign markets will yet see a Y2K-related dive, either before or after Jan. 1?

All that said, I think a rational person might have to conclude that foreign markets are a bet worth making for 2000. The fundamental trends seem to be quite friendly, and after the last few years, that’s saying something.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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Foreign Stock Funds: Some Ideas

Here are some of the foreign-stock mutual funds rated highest by fund tracker Morningstar Inc. for recent performance relative to the risk they took. Investors looking at any foreign stock fund should be sure that the fund’s objectives and style of investing match their own.

Total investment return

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Phone # Fund 1999 YTD 3 yrs.* 5 yrs.* (800) Acorn Intl* 47.4% 19.3% 13.2% 922-6769 Am Cent Intl Gro* 31.0 24.2 15.0 345-2021 Artisan Intl* 45.7 26.9 NA 344-1770 EuroPacific Gro 38.1 21.2 15.6 421-4120 Fidel Div Intl* 30.4 19.8 15.9 544-8888 Fidelity Europe 6.9 17.5 16.7 544-8888 Hotchkis/Wiley Intl* 17.8 10.7 11.2 236-4479 Matthews Pac Tiger* 66.3 --0.6 0.1 789-2742 Putnam Intl Gro 37.1 25.3 17.4 225-1581 Scudder Intl* 34.8 20.7 14.1 225-2470 Avg foreign fund 24.0 13.0 9.6

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* Annualized return in period ended Oct. 31

** No-load fund

NA = not available (fund didn’t exist for entire period)

Source: Morningstar Inc.