Opportunities still exist in stocks abroad


Rest of world probably will recover from financial slump before U.S. does

December 14, 2008|By Andrew Leckey | Andrew Leckey,Chicago Tribune

Individual investors who once envisioned global investing as a growth portion of their portfolios are feeling the pain. Emerging markets have been hit hard in the financial downturn. There's really nowhere to hide.

Even though the worst might not be over as we look to 2009, some experts believe the situation provides opportunities to increase international investments because much of the rest of the world will revive before the U.S. does.

"International stocks have been hit worse than U.S. stocks, but most of that difference has been due to the strength of the U.S. dollar," said Allan Nichols, equities strategist and editor of Morningstar International Investor in Chicago. "Europe had a drop similar to the U.S. when you remove currency effects, while some emerging markets have been hit worse than the U.S. and Europe."

Economies around the world will get worse before they get better, he said, because historically the financial markets are a six- to nine-month forward indicator of the economy.

"Yet, I still think some stocks are very cheap," Nichols said. "If you have a long-term time frame, there are some great companies on sale worldwide." He recommends these powerhouses:

* Diageo PLC of London is a leading producer of premium spirit brands that include Guinness, Baileys, Johnnie Walker and Captain Morgan.

* ABB Ltd. is a Switzerland-based provider of power and automation products and systems. Countries must rebuild electrical infrastructure, and this "great company with an excellent balance sheet" will be in demand, Nichols said.

* France Telecom SA holds large wireless market shares in France, the United Kingdom, Spain, Poland and other countries, with more than 118 million subscribers. Business has held up well and "will continue to generate significant amounts of free cash flow," he said.

Consumers' behavior will help determine which areas will hold up better in the downturn.

"The global economy is in contrast to the U.S. and some European markets, where the consumer has borrowed and borrowed and borrowed," said John Derrick, director of research for U.S. Global Investors in San Antonio. "When you consider who can best weather the storm, it is a lot of foreign markets."

Derrick said China, in particular, looks positive because it has close to $2 trillion in foreign currency reserves and a culture of saving. Although lower commodity prices have taken a toll on Russia and Brazil, they are in their best fiscal shape in a long time, he said.

"The coordinated response from central banks and governments around the world to this severe global downturn is very encouraging," Derrick said. "We are already getting a lot of stimulus in the works."

His caveat: The potential for the U.S. dollar to remain strong for a prolonged period would be a headwind to contend with if you are investing internationally. But if you invest in countries whose economies are more or less pegged to the dollar, such as China, there won't be such an issue.

Global stocks make sense in a portfolio, said Derrick, who doesn't consider an allocation of 25 percent to be too extreme. But given the inherent volatility, he said that requires a long-term view.

"We still have a downward trajectory for global recession because economic data keep getting worse and there is no sign of stability," said Alec Young, international equity strategist for Standard & Poor's Corp. "But as we move into 2009, the consensus is that we will have a better tone to the economy by the second half of next year, and, if that materializes, it should allow for better equity performance."

Exposure to overseas stocks is desirable, Young said. For example, S&P's model investment portfolio for investors has 12 percent in developed international stocks and 3 percent in emerging markets, he said.

"You will see recovery and strength around the world occur more rapidly than in the U.S., and a lot of the global strength will stem from China," said Zachary Karabell, president of River Twice Research in New York. "Just remember that the way that the stocks trade won't necessarily follow the economics of that country, since some economies are still national or regional, while their stock markets are increasingly global."

You don't need to invest in foreign stocks at all to have global exposure. If you hold an S&P 500 index fund, you have it because 30 percent to 40 percent of the S&P 500's profits come from abroad.

E-mail Andrew Leckey at yourmoney@tribune.com.

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