A world of opportunity
NEW YORK – There have always been lots of reasons to invest in international stocks: Opportunity abounds beyond our borders. But lately, many on Wall Street have raised their stake overseas as high valuations and slower growth at home make U.S. stocks relatively less attractive.
Investors can do the same through mutual funds and exchange traded funds, which can diversify risks associated with volatile foreign markets and currency swings.
“Growth rates around the world are not in synchronicity,” said John Krey, senior investment officer with Standard & Poor’s. “A number of factors are working against U.S. growth at this time … which means investors are looking for opportunities for growth elsewhere.”
The waning effects of tax cuts enacted by the Bush administration, higher energy prices and a weak dollar have conspired against domestic equities this year. But while our own indexes have floundered through most of 2004, a number of markets outside the United States have advanced, and some have even posted double-digit returns. Small-cap stocks in Japan are up 30 percent year-to-date; the Dow Jones country index for Austria has surged 25 percent, Mexico is up 14 percent and the Philippines has added 17 percent.
Of course, it’s never a good idea to make dramatic changes to your investment strategy based on something as capricious as currency market conditions. But understanding why big traders are sending so much money abroad can be instructive. And if the equity portion of your portfolio is currently dominated by domestic stocks, now might not be such a terrible time to introduce some geographic diversity.
“There are winners and losers for every macro-economic scenario you could have,” said Michael Porter, senior research analyst at Lipper Inc. “But I would say that the weakening dollar … has augmented returns on international stocks and might be a reason to consider them, all things being equal.”
There are plenty of other reasons to maintain a healthy chunk of exposure to international stocks. Many of the best companies in the world are domiciled outside the United States. If all of your stock exposure came from an S&P 500 fund, you’d never own industry leaders like Taiwan Semiconductor Manufacturing Co., Samsung Corp., Toyota Motor Corp., Nokia Corp., The Royal Dutch/Shell Group or software giant SAP AG.
In addition, a number of foreign markets, including China and other emerging economies in Southeast Asia and Eastern Europe, have attractive valuations and offer opportunities for growth not available in the United States. China and India, the two most-populous nations in the world, are increasingly attractive to foreign investment because of their low-paid, skilled work forces, and are poised to grow far more rapidly than the U.S. economy as a whole in the decades ahead.
“Investors should be flexible enough to go where the best investments can be found,” Porter said. “You shouldn’t be parochial and limit yourself to the U.S. because you cut out a lot of opportunities.”
If you’re venturing into foreign markets for the first time, you should start out with a broadly mandated international fund. Once you become more knowledgeable and comfortable with your investment, you can zero in on regions or single countries – keeping in mind that this is an aggressive strategy that even the most sophisticated investors might shy away from. Foreign markets, known for being extremely volatile, are notoriously difficult to time.