With America sputtering, investors may want to look abroad
Woe is us.
Unemployment is 9.7 percent. The U.S. stock market is still 25 percent off its high. The federal deficit is measured in trillions. Our dollar is mocked overseas.
The Chinese lecture us on fiscal responsibility as they lend us billions of dollars so that we can buy their TVs, clothing and other trinkets of an American lifestyle built on credit.
The 20th century was the American Century — with our nation the premier economic and military superpower. The 21st century may belong to someone else.
That possibility has implications for investors. If growth is going to be faster overseas, is that where you should be investing?
That’s not an easy question. Venturing abroad means taking currency and political risks that we don’t get at home. And foreign stock prices may already reflect high growth prospects, making them no bargain.
The chances are you’re already investing more globally than you think. The S&P 500 companies — all big American firms — draw 40 percent of their revenue from overseas, up from 32 percent eight years ago, according to T. Rowe Price, the Baltimore mutual fund firm.
At least in the short run, growth in the developing world will be more rapid than in the U.S., or Europe and Japan for that matter.
The International Monetary Fund expects economic growth of 2.7 percent in the U.S. this year, only 1 percent in the Eurozone and 1.8 percent for Japan. By contrast, the IMF expects 10 percent growth in China, 7.7 percent in India, 4 percent in Mexico and 6 percent in emerging markets overall.
This may be the first global economic recovery led by China. The world usually follows the U.S. The IMF expects the growth gap to continue through 2011, with 2.5 percent growth in advanced countries, and 6.9 percent in emerging markets.
Those growth rates should, in theory, mean higher company profits and higher stock prices. So, should we be buying stocks in Brazil, India or the Far East?
Over the past decade, you’d have been much better off investing in the developing world than at home.
Since March of 2000, the Hang Seng Index of stocks traded in Hong Kong is up 66 percent with dividends reinvested and measured in U.S. dollars. The Mexican Bolsa and Brazilian Bovespa were both up 269 percent and the Russian Trading System Index was up 725 percent as of midweek. By contrast, the S&P 500 index of large American stocks lost 3 percent over the last 10 years.
The last five years also favored the foreigners. The MSCI Emerging Markets Index gained 84 percent in that time, excluding dividends. The S&P was flat.
American investors have noticed. Lately, 95 percent of American investments in foreign stocks have gone into the emerging markets, notes Alan Skrainka, chief market strategist at Edward Jones in Des Peres.
Skrainka thinks that’s a mistake. "When the crowd heads one way, you’d better head the other," he notes. The emerging markets have largely had their run, and it’s too late to jump aboard, he argues.
As they say on the fund prospectuses; past performance is no guarantee of future return.
"The emerging markets have been temporarily underperforming the U.S. markets for the last three months. This could persist for a year or two," says Chad Morganlander, portfolio manager in global asset allocation at Stifel Nicolaus & Co.
Morganlander’s bottom line: Don’t jump into emerging markets with both feet. Tiptoe in during dips in the market.
If you’re thinking of investing there, you had better enjoy roller coasters. Emerging markets are 60 percent more volatile than the developed world.
The great stock market crash sent U.S. stocks down 56 percent from their 2007 highs by March of last year. Emerging markets fell 66 percent before bouncing back.
"It has a much rougher road on the downside than the U.S. market," said Morganlander.
There’s more oomph on the way up, too. Both the emerging markets and the S&P are now both 25 percent off their highs of 2007.
Step outside the developed world and an investor finds a whole new set of worries: the whims of Latin strongmen and Iranian ayatollahs, unstable currencies, religious conflicts and guerilla insurgencies.
While world stock markets were crashing in late 2008, investors in India had an extra worry — nuclear war as Indian and Pakistani rattled swords in the wake of the Mumbai massacre. The Indian market had dropped 73 percent by March 2009.
On the other hand, the emerging markets aren’t as wild and woolly as they used to be. Currency blowups, rampant inflation and outright fraud aren’t as common and fiscal controls are better. "In some cases, their sovereign debt picture is better than Japan, the UK, Greece, maybe even the U.S.," says Paul Christopher, senior international strategist at Wells Fargo Advisors in St. Louis.
All this argues for letting a pro do the stock picking, which is what you get when you buy a mutual fund.
Morningstar, the mutual fund analysis firm, recommends Oppenheimer Developing Markets (ODMAX) and American Funds New World (NEWFX). New World supplements emerging markets stocks by buying developed-country stocks in companies that do a lot of business in the developed world. That tends to smooth out the roller-coaster ride a bit, says Morningstar.
You could also buy the whole shebang at once. iShares MSCI Emerging Markets Index (EEM) is an exchange-traded fund that tracks an index of third-world stocks in 20 countries, with the bulk in China, Korea, Brazil, Russia, South Africa, India, and Mexico.
Another alternative is to target certain countries through country-specific funds. "The best opportunities in the world come from selecting countries the way you select stocks," says Christopher, of Wells Fargo.
China has been the big growth story of the past decade, but some think the Chinese market is overheated. Stifel’s Morganlander sees a bubble building. Much of last year’s growth was government-manufactured, the result of stimulus spending designed to make up for falling exports. Stimulus doesn’t last forever, he notes, and when the building boom ends, the nation could have a nasty fall.
India is a better bet, he says. It’s economy is less dependent on exports than China and the Indian government is friendlier to foreign investors.
Countries such as Brazil and Mexico are natural resource plays. They supply food and raw materials for the high-growth Asian markets.
Meanwhile, a stronger dollar is making one developed market — Europe — look a little sweeter at the moment.
The dollar was on a long decline against major currencies from 2002 to 2008, weighed down by our trade deficit. That’s one reason that foreign investments performed so well, when measured in dollars. The financial panic of 2008 sent the dollar up as worried investors fled back to the buck, but the greenback’s slump resumed last year.
Lately, though, Europe has been having its own financial panic over the chance that Greece might default on government bonds, followed possibly by Spain and Ireland. The euro is down 10 percent against the dollar since November.
If you think that the euro’s problems are temporary, and the dollar is still a dud, then European stocks look interesting. "If the dollar’s weakness resumes, you’ll earn a good return," says Skrainka.