Foreign stocks may be good plan for long-term investors

Monday, September 19, 2005

Buying for the short term would be a bet that the markets keep escalating and the dollar stays weak.

NEW YORK -- While U.S. indexes dully waver within a minuscule range, overseas markets are on fire.

Japan's Nikkei average hit its highest point since 2001 earlier this month. Britain's FTSE 100 Index on Friday had its best close in four years. Germany's DAX is at its highest level since 2002. Korea's KOSPI Index is up more than 20 percent so far this year.

"People need to appreciate that global markets now are in better shape than they've ever been," said Linda A. Duessel, equity market strategist for Federated Investors.

No one is saying you should bet the house on overseas markets, especially given that prices are at such historic highs and returns for U.S. investors have been boosted by the weak dollar, which makes a stock's increase in British pounds, Japanese yen or euros look even tastier once exchanged for dollars. Buying for the short term would be a bet that the markets would keep escalating and the dollar would stay weak.

For the long term, however, putting a piece of your portfolio in global stocks makes sense.

Foreign markets account for two-thirds of the world's total gross domestic product, said Michael Mullane, international client portfolio manager at NWQ Investment Management Co. LLC, an affiliate of Nuveen Investments. Foreign stocks also represent more than 50 percent of the world's total market capitalization.

Institutions make sure they have a chunk of their portfolios riding on international markets. On average, institutions allocate 11 percent of their portfolios to non-U.S. equities, according to Richard Herring, a professor at the Wharton School of Business. Yale University Endowment has 14.8 percent of its portfolio in equities outside the United States.

By contrast, many retail investors' stakes in foreign markets look paltry.

"A lot of us are invested, but invested in a market that's too fully developed," said Richard Driehaus, chairman and chief investment officer of Driehaus Capital Management Inc., which manages about $3 billion. "People are underparticipating in real-world growth."

Overall, foreign markets have lower valuations than the United States. While stocks in the Standard & Poor's 500 trade for about 15.5 times estimated 2005 earnings, stocks in the United Kingdom trade around 13 times estimates, Duessel said.

Many foreign stocks also pay a better dividend than U.S. stocks. The dividend yield for the S&P 500 is roughly 1.7 percent. But the MSCI-EAFE Index, which tracks changes in foreign stocks, has a 2.5 percent yield, she said.

Foreign investing is easier than it used to be. The proliferation of exchange traded funds are an easy way to buy an index of stocks from a nation or a region. One caveat: Since you may not follow the swings of swings of international markets daily, it's wise to put a stop loss order on the investments.

Which countries or regions look good?

While China has been in the headlines, many analysts are more excited by Japan and the recent landslide re-election of Japanese Prime Minister Junichiro Koizumi. The hope is that the election, which gave his party a clear majority, will set the stage for further economic reforms, such as privatizing the postal service and making the country's banks more transparent.

The Japanese stock market has already changed. Foreigners now own one-quarter of the market, so they have a much bigger voice than they have in the past, when they owned less, Mullane said.

Japan, the world's second-largest economy after the United States, benefits from China's boom, selling China energy and commodities. As a result, gross domestic product growth in Japan is the strongest it's been in a decade. Unemployment has fallen and the country's real estate market is rebounding.

"It looks like the economic recovery there is the real McCoy," said Michael Strauss, chief economist at Commonfund.

Tom Lydon, president of Global Trends Investments in Newport Beach, Calif., said Eastern Europe is booming, particularly countries like Slovakia and the Czech Republic.

"You have a great number of young, educated people who are willing to work," he said.

Automakers, including Porsche and Kia, have built plants in the region and countries such as Austria are working on the nations' banking systems and communications systems.

Buying an Austrian Exchange Traded Fund is an easy way to participate in the Eastern European boom, Lydon said. "By buying one security, you're basically indexing Eastern Europe."

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