1993 was a banner year for international stocks

STAYING AHEAD

January 23, 1994|By JANE BRYANT QUINN | JANE BRYANT QUINN,1994, Washington Post Writers Group

NEW YORK -- Foreign stocks threw a party last year and everybody came. All together, international mutual funds rose 39 percent in 1993, according to Lipper Analytical Services. By region, Japan funds gained an average of 20 percent, European funds 26 percent, Pacific funds (not counting Japan) a stupendous 63 percent and Latin American funds a superstupendous 65 percent. That compares with 12 percent for general U.S. equity funds.

American money poured into these markets in huge amounts. In both October and November, 28 percent of net new stock-fund investment went abroad, according to the Investment Company Institute. In December, some individual fund groups were reporting historically high percentages. At Baltimore's T. Rowe Price, for example, 82 percent of all the new money for stocks flowed into foreign funds.

A few years ago, adventurous investors held around 5 percent to 10 percent of their money in foreign securities. In the past few months, that has risen to 40 percent or 50 percent -- "a remarkable shift, which at some point could be a negative for the U.S. market," says Ralph Wanger, manager of the Acorn and Acorn International funds.

The global party isn't over yet. Most analysts believe that the case for owning foreign stocks remains exceptionally strong.

The Mexican market is expected to gain from that country's falling interest rates, enthusiasm for the North American Free Trade Agreement (NAFTA) and the spurt in government spending that typically precedes a national election. Some South American countries -- especially Argentina, Chile and Colombia -- also look like good prospects, thanks to falling interest rates and reduced inflation.

Much of continental Europe remains in recession, but falling rates in France and Germany are preparing the road to recovery. European stocks will probably beat the American market for several years, in the view of John Ballen, manager of the MFS World Growth Fund, even if Europe's growth isn't robust. Except for deep-pocket speculators, however, eastern Europe is still off the economic map.

In East Asia, the story remains brute growth, fed by the avalanche of money from American mutual funds. "These markets are small, so it only takes a small amount of U.S. money to move them," says Mehran Nakhjavani of the Montreal-based Emerging Markets Analyst. That suggests a potential plunge in price if Americans lose their appetite for the Pacific Rim. As backup, however, these markets have Japan, whose investors are also buying more Pacific-area stocks.

Emerging countries all over the globe got a boost from the tariff cuts contained in the new General Agreement on Tariffs and Trade (GATT), Nakhjavani adds. These developing economies depend more on trade than established, industrial economies do and GATT gives them access. Taiwan, South Korea and Argentina look undervalued, he says, but Brazil, Turkey and the Philippines could be stock market disasters waiting to happen.

Larry Jeddeloh, editor of the Institutional Strategist in Minneapolis, says that the riskiest markets today lie in China, Thailand and Hong Kong. The analysts differ sharply, however, on whether Japanese stocks have seen their cyclical lows. Some see better times ahead, others see doomsday. Jeddeloh stands on the middle ground. In his opinion, the Nikkei index will go nowhere for years while Japan restructures its economy. One reason not to hold international index funds, which copy the movements of a basket of foreign stock market indexes, is that they're loaded with Japanese securities.

But it's madness for individuals -- unencumbered as they are by knowledge of local business trends -- to try to evaluate specific foreign markets. That's the reason to own a mutual fund.

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