As Strains Go Global, It's a Time to Pick and Choose Abroad
Sunday, March 30, 2008
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-highflying markets such as 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 those 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."
She is not daunted by the recent upheaval around the globe; she thinks other countries can at times make her more money than the United States 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 people with credit card debt or seeking loans, it means the interest earned on investments such as savings accounts and bonds is likely to decrease.
Investors searching abroad for deals will find, however, that many regions have fared worse than the United States 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 favorites of U.S. investors, such as India, Russia and Brazil, have also shown big declines.
Geoffrey C. 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 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. Those 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 & Associates in Toronto, said investors looking to funnel money abroad should examine some of the same defensive areas -- consumer staples, 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, that investors should not 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.