Investing overseas requires that investors do homework first

NEW YORK -- Investing in overseas stocks has been like a whirlwind trip abroad for U.S. investors the past few years. Now the journey has ended, at least temporarily, with a lesson in market forces.

Once high-flying markets like China and India are now feeling some of the same strains that are dogging Wall Street. Concerns about an economic slowdown have popped up worldwide and that means U.S. investors looking to put down money overseas probably need to be more selective.

Overseas holdings have had an allure for investors like Alexis Doyle, who likes them simply because there can be stronger returns outside the United States. Doyle, an educator who lives in New York, looks for "good value regardless of geography."

And she's not daunted by the recent upheaval around the globe -- she thinks other countries can at times make her more money than the U.S. will.

"Basically, what the feds are doing is cutting interest rates aggressively so you have to find higher interest rates elsewhere," she said, referring to recent decisions by Federal Reserve policymakers to lower interest rates to stimulate the U.S. economy. While lower rates can be good news for some people with credit card debt or for those seeking loans, it means the interest earned on investments including savings accounts and bonds will likely decrease.

But investors searching abroad for deals will find many regions have fared worse than the U.S. in recent months.

Global markets have pulled back in March after gaining some ground in February and showing sizable losses in January, according to Standard & Poor's. In China, stocks are off by about one-third this year. Other developing countries that have been a favorite of U.S. investors, like India, Russia and Brazil, have also shown big declines in 2007, while in the U.S., the S&P 500 is down about 8 percent.

Geoffrey Pazzanese, co-manager of the Federated InterContinental fund, which has more than $900 million in assets, said that while volatility in one market can cause ripples in another, the correlations tend to disappear over longer periods. He still recommends that most U.S. investors have about 20 percent to 25 percent of their holdings in international investments.

These days, however, it's important to do some digging before investing.

"You need to pick your markets," Pazzanese said. Investors considering investing in a country should examine long-term themes like demographic shifts, the availability of natural resources and other large forces that shape economies.

"Look first for emerging markets that are growing attractively and that are having a sustainable growth pattern and attractive valuations. You have to just do your homework."

Subodh Kumar, global investment strategist at Subodh Kumar & Assoc. in Toronto, said investors looking to funnel money abroad should examine some of the same defensive areas like consumer staples and health care that they might turn to if they were girding for a U.S. pullback.

"As long as there is uncertainty about a recession in the U.S. and a slowdown globally, I think equity markets worldwide will remain highly correlated," he said.

Kumar said, however, investors shouldn't mistake what could be a short-term slowdown in worldwide economic activity as marking the demise of big growth potential for economies in places like China and India.

There are potential hurdles, he noted. The weak dollar, which is often highlighted as a reason why U.S. investors should have holdings denominated in other currencies, could help or hurt investors.

The dollar's slide in recent months to fresh lows against other major currencies could mean strong returns when investors convert investments back into dollars. But a partial recovery in the dollar, which some observers say is due, could eat into this bounce.

At the same time, a further decline in the dollar could stir unease in international markets and cause them to fall, Kumar said.

He said investors stepping into international investments should likely do so gradually to guard against the effects of short-term fluctuations in currencies and in the world's markets.

"It goes back to looking long term. It's a good idea to be diversified internationally but I still think you can allocate your investments more gradually. You don't necessarily have to do it all at one time."