Time For An Accent?
A dash of international funds or stocks could add some oomph to your portfolio
A megaterrorist strike in Spain. A terror cell discovered in Britain. Increased guerrilla attacks and kidnappings in Iraq. A continuing stream of taped warnings from al Qaeda. Certainly not the kind of news you want to hear if you're a global investment pro responsible for deploying millions of dollars overseas.
But David Herro, chief international investment officer at Oakmark funds in Chicago, is taking all the scary headlines in stride. "I actually have a real feeling of tranquillity from an investment perspective right now, especially compared to a year ago," Herro says. "Then, there was so much fear in the marketplace. Fear of war, fear of the three-year bear market not ending, fear of the economy not recovering, fear of corporate scandals."
How in the world can he remain so calm? "Despite the bad news, the global economy is still doing well," he answers. Economists are forecasting world gross domestic product growth of around 3.6 percent in 2004 after a gain of 2.5 percent in 2003. And the consensus estimate for 2005 is still a solid 3.2 percent.
Numbers like those are a big reason a Merrill Lynch survey earlier this month of global money managers found their "risk appetite remains surprisingly high . . . despite the Madrid bombings and the deteriorating security situation in Iraq." Perhaps no destination is more popular right now than Japan. The Merrill Lynch survey found that 43 percent of managers would overweight Japan in their portfolios, while only 7 percent would underweight it--the best numbers by far for any country or region. With Japan's economy expected to notch its strongest growth since the late 1980s, the benchmark Nikkei index is up 11.9 percent so far this year after a 22.5 percent gain last year (though it's still below its 1989 high).
World tour. Credit China for Japan's newfound fortune. "Japan is a huge beneficiary of the growth in China since it is a capital-goods provider for the Chinese manufacturing boom," says manager Bill Wilby of the Oppenheimer Global fund, up 53 percent during the past year. One of his favorite stocks is Keyence, a maker of sensors for production lines. Among U.S.-traded Japanese stocks, he likes Canon. Wilby says the company's digital camera, printer, and chip-making equipment businesses "are all going great guns." But there's growing optimism that the country's domestic economy is also perking up. "A lot of the export companies are already at sky-high valuations, while smaller, domestic-oriented companies are at rock-bottom prices," says Bernard Horn of the Polaris Global Value fund, up 69 percent during the past year. Horn's top pick is Maruichi Steel Tube, a maker of steel pipes and tubes.
India is also a focal point of managers. Not only did its economy grow at a sizzling 7.5 percent rate last year with expectations for 6 percent growth this year, but India also edges out China as the emerging market of choice for some. "In India, you have superior corporate governance and property rights and contract law whereas China is still trying to establish that," says Wilby. It also has world-class companies such as information services providers Infosys Technologies and Wipro (both have U.S-traded stocks), which are "taking market share from U.S. and European companies," he adds.
And what about Europe? As Herro pointedly says, "With the U.S. growing strong and Asia growing excessively strong, the only region not doing well is `old' Europe, all the Eurosclerosis countries like France, Germany, and Belgium." Indeed, growth for the so-called Eurozone was just 0.5 percent in 2003, and economists are looking for anemic growth of only 1.8 percent this year. Growth is a bit peppier in the United Kingdom, where Horn likes home builders such as Barrett Developments and George Wimpey. Herro likes U.S.-traded drugmaker GlaxoSmithKline for its strong product pipeline.
No one is saying that you should go exclusively international. It's just that with rising interest rates rattling stocks here at home, it might be time to send some part of your portfolio packing.
This story appears in the May 3, 2004 print edition of U.S. News & World Report.
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