Could red-hot foreign markets burn out?

As more Americans grow comfortable with placing their money abroad, some experts fear that the risks of world stocks are being ignored.

from the August 13, 2007 edition

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Today, he says, international investing is an easier sell than it was in the mid-1990s. Educating clients now takes much less time, as clients witness the increasingly global nature of business, get better information about world economies today, and observe the "easier flow of money around the world," Mr. Gott says. "People feel if they're not participating overseas, they're missing something important."

Gott believes this attitude is "permanent." "The professionals we know and deal with around the country are much more in agreement with this [long term view on foreign investing] and are less likely to lead their clients back and forth, in and out, of foreign markets."

But investment practices notwithstanding, questions do arise as to whether to put money abroad now. Have the markets abroad started looking tired and spent?

For his part, David Herro, Chicago manager of the Oakmark International Fund, doesn't seem wildly enthused right now. "I don't think foreign stocks will do poorly. But the [degree of] outperformance of the last five years will not be repeated" in the coming years, he says. "At this stage, the currency tailwind could go away and turn into a headwind, since the dollar is looking undervalued" versus foreign currencies.

And although foreign "companies should continue to earn profits," he says, "the differential in valuations that existed five to six years ago is not as pronounced today."

Thus, "people shouldn't jump on the [international] bandwagon now," Mr. Herro warns – although "they should have some foreign exposure."

But the current turmoil in stock markets sheds light on the need to be invested outside the US – and in a broadly diversified way, says Somnath Basu, director of the Institute of Finance at California Lutheran University in Thousand Oaks, Calif. "Being dependent on a single market at this time would be a very dangerous thing. It would be like putting your whole portfolio in a single company," he says.

Mr. Basu believes that now is "a good time to get into as many world markets as you can."

And to John Chisholm, co-chief investment officer at Acadian Asset Management in Boston, market returns from abroad still look relatively favorable – if not as stellar as in recent years. Over the next five years, he figures European markets should produce 10 to 11 percent annualized returns, with world markets gaining an annualized 8 percent, and the US market posting a lesser 7 percent annualized return over that period. Thus, from a returns perspective, Mr. Chisholm believes "there still is a reason to stay invested" overseas.

 

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