Foreign Funds Remain in Good Stead Despite Shaky 1st Half
Americans with money in foreign stocks didn’t have much to write home about in the first half of this year.
After tremendous gains in most foreign markets in 1999, the first half of 2000 saw heavy profit-taking in many markets, triggered in large part by the slump in the U.S. Nasdaq market that began in March.
The average foreign stock mutual fund suffered a net loss of 4.6% in the first half, according to fund-tracker Lipper Inc. By contrast, the average U.S. diversified stock fund gained 3.7%.
Although some foreign markets, notably in Europe, posted better returns than the U.S. market when measured in native currencies, the dollar’s strength for much of the first half eroded those returns for U.S. investors.
Still, measured over the last 12 months the average foreign stock fund is up 24.5%, versus 19% for the average U.S. fund. And longer-term trends in many regions of the globe favor equity investments, foreign-stock fund managers say.
David Herro, manager of the Oakmark International and Oakmark International Small-Cap funds in Chicago, says he is more bullish on the global investment outlook than he has been for a long time. He sees a continuing economic rebound in Europe and Asia--outside of Japan, that is--and positive political and economic trends in Latin America.
A broader and potentially longer-lasting trend is that across the globe, more economies and companies are embracing the idea of open markets and shareholder-oriented business policies, Herro said.
That has been a theme of many foreign-market bulls for the last few years, and it’s a point that new and veteran investors alike ought to remember in assessing the long-term appeal of foreign stocks, the bulls say.
Although it took 30 years for Britain to privatize British Aerospace, British Telecom, British Steel (now Corus Group) and the like, the same process took five or six years for Brazil and only a couple of years for South Korea, Herro noted.
As the pace picks up, he added, opportunities for investors will abound.
What’s more, even after stellar returns last year, the gains in most foreign markets have far trailed the U.S. market over the last five years. That’s an argument for at least some continuing catch-up performance, some experts say.
In the near term, foreign markets’ prospects may remain closely tied to what happens in the United States, particularly with interest rates.
If the Federal Reserve has indeed come to the end of its credit-tightening campaign--and if the European Central Bank also is nearly finished raising its key short-term rate--the path of least resistance for many markets may be up, experts say.
Region by region, here are some of the themes to watch in the balance of 2000:
Europe
Europe remains the favorite region of many global portfolio managers. The big draws: continued economic growth, potentially stabilizing interest rates and ongoing consolidation in many industries.
But just as analysts have warned about excessive valuations in the U.S. tech sector--even after this spring’s collapse in the Nasdaq stock market--many European tech and telecom stocks’ valuations have soared. Investors in European funds, and indeed in all diversified foreign funds, should examine how heavily their funds are invested in tech shares.
For example, telecom giants Nokia and Ericsson dominate their home-country markets, Finland and Sweden, respectively. Deutsche Telekom and France Telecom, to name the key players from the two biggest economies, also have had a big hand in German and French stock market gains over the last year.
Technology, media and telecom are “overpriced everywhere,” Herro said, but financial services, drug and consumer nondurables in Europe are relatively cheap.
Why pay a high price for wireless carrier Vodafone AirTouch when you can have Diageo, the British food, liquor and restaurant conglomerate for only nine times earnings? he asked.
Apart from the strengthening economy, many global fund managers remain excited about Europe’s continuing merger wave.
John Tribolet, a portfolio manager who focuses on Europe for Loomis Sayles & Co. in San Francisco, notes that the corporate restructuring wave that hit the U.S. in the 1980s and early 1990s still appears to be in a relatively early stage in Europe.
The advent of the euro common currency for most of Continental Europe will only hasten the consolidation of the banking and insurance industries there, he said.
But the euro also has been problematic for U.S. investors: Its weakness against the dollar has robbed U.S. investors of 5 or 6 percentage points worth of gains in euro-denominated stocks so far this year.
The French market, for example, is up 8.9% year-to-date in franc terms, but just 3.3% in U.S. dollar terms, adjusting for the euro’s decline.
But since late May the euro has been rebounding. Pavlos Alexandrakis, portfolio manager of the Pioneer International Growth Fund in Boston, predicts it will continue, providing U.S. investors with a tail wind for the rest of this year. (A stronger euro would automatically provide stronger relative returns from European stocks.)
Two longer-term trends also make Alexandrakis bullish about Europe: First, the culture of stock ownership is only beginning to build among Europeans, and as excitement grows, demand will increase, benefiting early investors.
Second, private pension schemes are only in their infancy in Europe; as they catch on, that also will increase demand for stocks.
Asia
Many portfolio managers still have little encouraging to say about Japan, whose economy remains troubled despite recent signs of improvement.
What’s more, Japan’s economy remains largely protected from competition, and many of its companies still are run for the benefit of management rather than shareholders, Oakmark’s Herro argues.
“It’s a First World country that acts like a Third World country,” he said. The Nikkei-225 blue-chip index is down 7.2% year-to-date in yen terms.
More charitably, Alexandrakis noted that such Japanese multinational companies as Sony, Toshiba and Canon are growing more efficient and are adopting more shareholder-friendly attitudes.
And Japan’s Jasdaq index, heavy with smaller tech issues, did have a great run early in the year, before slumping with Nasdaq.
David Mannheim, an international manager with the MFS funds family in Boston, said that while there is little top-line, or revenue, growth to speak of, the most successful Japanese companies are managing to increase profits by cutting expenses.
Elsewhere in the region, Asia specialist Paul Matthews of Matthews International Funds has been buying South Korean shares again, in the wake of the 17% year-to-date decline in the main Seoul stock index. That followed an 83% surge in 1999, as that market led East Asian markets’ rebound after the two-year-long regional economic slump.
But Matthews advises steering clear of some of the smaller Asian economies, such as Malaysia, Indonesia and the Philippines. The lack of “transparency,” or access to reliable financial information about corporations, remains a particular problem in the Philippines, Matthews said.
Among Asian tech and telecom stocks, valuations are high, as they are worldwide, Matthews said. Still, he noted that deregulation in the telecom industry is proceeding rapidly and adoption of new technologies by consumers--starting from a much lower base than in other parts of the world--is growing faster than in the rest of the world.
Heading a list of positive long-term developments in Asia are, according to Matthews, the agreement to admit China into the World Trade Organization, which will entail the privatization of telecom and banking assets there.
Another big plus from a geopolitical and economic standpoint is North Korea’s emergence from decades of isolation, Matthews said. It isn’t yet a factor for investors to “play,” but it adds to a positive backdrop.
The Americas
Canada has been the global star this year, fueled by telecom issues (especially Northern Telecom) and oil and gas stocks.
Meanwhile, Latin American markets tumbled with the Nasdaq market in spring, but Mexico and Brazil, in particular, have recovered quickly. The Mexican market index is up 3.8% year-to-date in peso terms. Nasdaq, by contrast, still is down 2.2%.
The victory of Mexican President-elect Vicente Fox and his National Action Party (PAN) over the entrenched Institutional Revolutionary Party (PRI) is generally regarded as a positive for Latin American investors, although some analysts said there could be some near-term political turbulence.
Tribolet said telecom stocks are more reasonably priced in Latin America than in Europe and Asia.
Mannheim favors Mexican blue-chips like Grupo Televisa and Wal-Mart de Mexico (formerly Cifra) and is generally more positive on Mexico than on Brazil.
But with interest rates falling in Brazil, Herro believes it is “only a matter of time before Latin America lights up again” economically. He is high on Argentina as well as Mexico.
He cited bargains such as Quilmes, the Argentine brewing company with a 75% market share in much of southern South America but a selling price of only 7 times earnings before interest and taxes.
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Foreign Stock Funds Boast Hefty
12-Month Gains . . .
Many foreign-stock mutual fund categories have outperformed the average U.S. fund over the last 12 months, despite a weak first half of 2000. Average returns by fund category:
Average 12-month return through June 30. . . But Longer-Term They Lag the U.S. Market’s Return
The average U.S. stock mutual fund has far outperformed the typical foreign fund over the last five years. Average returns by fund category:Average 5-year return annualized through June 30
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
How Individual Markets Have Fared Canada’s stock market is the world’s best among major markets this year, boosted by telecom stocks and by natural-resources companies. Here’s a look at key foreign stock markets, with each market’s price change in 1999 in native currency terms, the year-to-date change in native currency terms, and the year-to-date price change in U.S. dollar terms (the true return to U.S. investors). *--*
Price change Year-to-date in native currency: change in Market(index) 1999 Yearto date* U.S. dollars* Canada (TSE-300) +29.7% +21.7% +19.0% France (CAC) +51.1 +8.9 +3.3 Australia (All Ord.) +12.1 +5.5 --4.8 Mexico (IPC) +80.1 +3.8 +4.2 Brazil (Bovespa) +151.9 +2.2 +2.5 Germany (DAX) +39.1 +1.6 --3.6 Netherlands (AEX) +24.7 +1.1 --4.1 Hong Kong (Hang Seng) +68.8 +1.6 +1.3 Argentina (Merval) +28.0 --3.0 --3.0 Taiwan (weighted) +31.6 --3.6 --1.9 Britain (FTSE-100) +17.8 --6.7 --12.7 Spain (IBEX) +18.4 --7.0 --11.7 Japan (Nikkei) +36.8 --7.2 --11.1 Singapore (S. Times) +78.0 --15.6 --19.0 South Korea (composite) +82.8 --16.5 --14.9 U.S.S&P; 500 +19.5 +0.4 +0.4 Nasdaq composite +85.6 --2.2 --2.2
*--*
* through Monday Source: Bloomberg News
