For American investors sizing up equity markets abroad, a cash-in-hand leap overseas looks riskier than at any time in years.
Across the Pacific, currency and equity values in East Asia are spinning downward with no smooth landing in sight.
Across the Atlantic, 11 countries in the European Union are preparing for one of the most sweeping and problematic economic makeovers ever attempted. They plan on Jan. 1, 1999, to toss out their own currencies, surrender their sovereign monetary control to a central European bank, and honor a common regional currency.
If such uncertainties are not enough, would-be investors abroad must also contend with a gnawing fact: Foreign equities have badly lagged behind their US counterparts during the 1990s.
"You're better off investing in the United States on a very selective basis," says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. "Wait until Europe sorts out its EMU [European Monetary Union] problems and Asia gets back on its feet," says Mr. Wesbury, who is bullish on US bonds.
Still, analysts generally agree in principle that foreign investing can pay off today as long as one invests with care.
In 1997, for example, Asia's problems didn't stop stocks from gaining 59 percent in Italy, 56 percent in Mexico, and 25 percent in Britain.
Indeed, since the early 1980s, foreign markets have soundly beaten Wall Street. Morgan Stanley Capital International's global EAFE Index has equaled or outpaced the Standard & Poor's 500 index in 14 of 16 recent 10-year periods, beginning with the 1971-81 stretch, according to T. Rowe Price.
The poor showing in the '90s stems largely from the collapse of equities in Tokyo, the biggest non-US market.
And the potential gains aren't the only reason to spread your wings abroad. When US equities sag, some overseas stocks may provide solid returns. That should reduce the overall volatility of your portfolio.
"You get a more stable return stream by investing overseas," says Joshua Feuerman, managing director of global equities at State Street Advisors in Boston.
Although a stumble on Wall Street can prompt downturns worldwide, major foreign markets do not walk in lock-step.
By investing abroad, investors cut volatility while not compromising returns. Over the past two decades, the optimum mix of 30 percent foreign stocks and 70 percent US stocks yields a higher return with fewer ups and downs than an all-US equity portfolio, say analysts.
Foreign markets have lost appeal in part because investors have sought to ride the eye-popping bull run on Wall Street, analysts say.
But the high-priced "US market will at some time revert back to its historic annual gains of around 10 percent," predicts State Street's Mr. Feuerman. "Overseas, no market stays in the doldrums forever," he adds.
Looking into 1998, investors may pick up many shiny blue chips beyond US borders: for example, nine of the 10 largest electronics companies and seven of the 10 largest auto companies, according to Morgan Stanley Capital International.
Analysts target several opportunities overseas. Italy, France, and Great Britain offer promise, says Peter Cardillo, director of research at Westfalia Investments in New York.
In Latin America, Venezuela and Brazil are unusual "hot spots." Two telecommunications stocks, Compania Anonima Nacional Telefonos de Venezuela (VNT) and Telecomunicacoes Brasileiras SA or Telebras, should rise on the heels of deregulation, Mr. Cardillo says.
Some investors are boldly starting to bottom-fish Asian markets.
Japan's economy should begin shaking off seven years of torpor as the government starts facing up to the banking system's mountain of bad debt, says Feuerman, who manages State Street's emerging-market mutual fund.
South Korea, the latest economy sucked into East Asia's market maelstrom, could pay off handsomely long term. "Korea will open the year with a rally that should build in February and March," Feuerman predicts.
But Wesbury favors just Latin America and Eastern Europe, largely because they should hold their own against the uncertainty in East Asia and Western Europe.
Wesbury's preferred play abroad is through the equities of US multinational companies.
That way, an investor would profit from overseas growth and a continued US bull market, while avoiding some of the currency, political, regulatory, and other risks of foreign investing. He recommends US exporters of electronics, a sector of big long-term promise.