Insights & Advice

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Foreign Investing is For Everyone

Over the last six years foreign stock markets have been the place to be if you wanted to capture double digit investment returns. This year overseas markets especially emerging markets have pulled back along with the U.S. markets. I see that as a buying opportunity for long term investors.

My own experience in foreign markets dates back to 1982. Back then there were only a handful of American investors willing to dip their big toes into markets like Europe or Japan. I would traipse around the world with twenty or so highly doubtful American money managers in tow visiting “exotic” places like the South of France and Melbourne, Australia. As time went bye more and more managers, attracted by the promise of greater returns, took the plunge. By 1989, most institutions had some exposure to overseas markets. By then I was already kicking tires and talking shop with companies in Brazil, Eastern Europe and that once, Evil Empire, Russia.

I maintain that every investor should allocate at least 20-25% of their overall portfolio to foreign stocks and/or bonds. Many conservative managers disagree. They say foreign markets are too risky for that largely because the American-based investor has to get two things right: the markets and the currencies. They also point out that differences in securities law, accounting and even political systems make foreign markets unpredictable and volatile. In my opinion that’s a load of B.S.

Granted the historical drop in the dollar over the last few years has benefited overseas investments and when the dollar declines the value of your foreign stock or bond goes up. Yes, given the low levels of the dollar right now, there is more than an even chance that the next move of the greenback is up. That might temper your gains but by no means quell the case for investing overseas.

As for the rest of the arguments, ask yourself what country precipitated the sub-prime crisis? The facts are that many of the laws, regulations and political bodies of foreign countries now equal or in many cases provide greater protection to all investors, including Americans.

The United States now represents about 25% of the world’s stock market capitalization and that number continues to decline. At the same time, we ranked 57 out of 60 of the highest priced markets in the world. As of last week, the NASDAQ and S&P 500 ranked one and three in global price/earnings ratios, which is a valuation investors use to compare stocks and markets. While this year some of the higher-priced emerging markets like China and India have experienced 30-40% declines from their peak.

Developing economies now account for 35% of global GDP and their share will continue to grow at an ever-increasing rate. One reason is the wage differential: developed economies like the U.S. and Europe’s wage rate is about $20/hour while the remaining 80% of the world is only $5.00/hour. It’s hard to compete with that. Then there is the awakening demand of billions of overseas consumers who for the first time in history are able to contemplate the purchase of things likes automobiles, education and even housing. Think of America at the beginning of the Twentieth century and you’ll get the picture.

There are several ways to invest in foreign securities. The fact that most investors are not that familiar with foreign markets other than the one-off vacation they may have taken in Italy or Hong Kong, it is better to let the professionals handle it. The easiest method is through mutual funds and exchange traded funds. Almost every fund family has several offerings ranging from large, multi- country type investments to emerging market and even country funds.

There are also American Depository Receipts or ADRs. These are negotiable instruments representing an ownership interest in the security of a non-U.S. publicly traded company. They trade just like stocks and are quoted in U.S. dollars and take the complexity out of foreign investment. Finally, many brokers now offer direct foreign investment in certain markets. Both Schwab and Fidelity, for example, have large international divisions who trade foreign stocks overnight in Asia and Europe for retail customers.

Finally, some experts contend that foreign markets over time are becoming less correlated with their U.S. counterpart and therefore offer greater diversification and less risk. Unfortunately, that theory has yet to be proven. Clearly, there are times when that occur and times, like in this year’s downdraft, when world markets are tightly correlated. To me, it’s simply a question of where can I garner the greatest long- term returns. For the foreseeable future, I’m betting on the 80% of the world that is playing catch-up. The markets I favor over the next ten years or so would be China, India, various Latin American countries like Brazil and Chile and Eastern European markets.

Posted in A Few Dollars More, Investment Styles