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Foreign Stocks May Lead The Way

- Alan Lavine and Gail Liberman

Could this be the year that international funds lead the way? Some analysts and money managers think so. But don't bet the ranch on the overseas markets.

Overseas stocks have underperformed U.S. stocks for more than a decade, but the tables are turning. Money managers believe there are terrific bargains overseas. Stock valuations are low and corporate earnings are growing faster than those of U.S. stocks. The weakening dollar makes foreign currency investing rewarding. So we could be in for a long period of foreign stock outperformance.

One harbinger of good things to come is overseas corporate profitability. It is rising while U.S. profits have been declining, according to McGraw-Hill data.

The financial markets are sensitive to this trend. As of June 30, emerging market stock funds were up an average of 3.64 percent for the year, according to Morningstar Inc., Chicago. By contrast, the S&P 500 is down -13.78 percent. Ronald Welburn, investment strategist with Merrill Lynch Private Investors, Plainsboro, N.J., is optimistic about some overseas markets.

He favors Asia and Japan over Europe and Latin America because productivity and savings are higher in Asia.

Despite the optimistic outlook, the International Monetary Fund has serious concerns about the global economy. The IMF's recent report, "World Economic Outlook: The Global Economy After September 11," cites these risks.

  • U.S. economic growth may be slower than expected due to overinvestment.

  • Access to capital in the emerging markets depends on the economic growth of industrial nations.

  • In down markets, individual country markets move more in tandem than in up markets.

    Fund managers are the first to say that the foreign markets are volatile. Nevertheless, they believe in a long-term rebound.

    "We are coming off a period where international stocks drastically underperformed the U.S. markets, says Betsy Palmer associate portfolio manager of the MFS International New Discovery Fund, up 5.23 percent as of June 30 this year. Stock prices in relation to earnings are 70 percent of U.S. stocks."

    Palmer favors small-cap and mid-cap stocks--particularly in Europe. International New Discovery Fund is loaded with natural resources and basic materials stocks.

    Christopher Anderson, manager of the T. Rowe Price Emerging Markets Fund, says he is buying growth at attractive prices in the large-company and mid-size company sectors. As of June 30, the fund was up 2.7 percent for the year. The average holding of the fund is growing earnings at 26 percent. He owns companies with strong balance sheets, like Wal-Mart de Mexico and Samsung Electronics.

    "The Pacific region is the most geared to the economic up cycle," Anderson says. "Property prices are rising and banking systems are improving."


    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

    To read more columns, please visit the column archive.

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