Going Global
Adding an overseas fund could be just the tonic for your portfolio
When President Bush made the surprising decision to re-enlist Treasury Secretary John Snow in his cabinet, investors took that as a sign of the administration's "two dollar policy." In other words, Wall Street thinks the White House will talk about wanting a strong dollar but won't do much to keep the greenback from sliding further.
Many investors view this as a green light for continued traffic into foreign funds, since Americans who invest abroad can make money even if foreign stocks don't appreciate--so long as the dollar loses value.
The good news is that investors have been rewarded with outsize gains in foreign markets even without the benefit of the currency trade. British stocks were up 19.8 percent in 2004, but even in their local currency, U.K. shares rose 12.3 percent. Without the aid of the weak dollar, Spain's stock market still surged 22.9 percent, Italian shares soared 24.8 percent, and French stocks were up 14.2 percent. Overall, international stock funds gained nearly 18 percent last year, according to the fund tracker Morningstar. By comparison, the average domestic stock fund posted a gain of only 12 percent.
Gold rush. Not surprisingly, money has rushed into foreign shares. In a record-breaking year, international or global portfolios attracted an estimated $100 billion in new investments, according to Strategic Insight. That's up from just $41 billion in 2003.
Nevertheless, market watchers say it's dangerous to invest overseas simply because you think the dollar will continue to fall. To be sure, many economists do think the dollar will slide further this year, in the face of a growing federal budget deficit and still-low interest rates. Standard & Poor's predicts the greenback could lose an additional 10 percent of its value this year. But given that the dollar has already weakened for three years, "it's getting late to play the currency game," warns Stuart Schweitzer, global investment strategist for J.P. Morgan Fleming Asset Management.
Investors should instead focus on the fundamentals, Schweitzer says. The primary argument for going abroad in the short term is that foreign stocks are trading at cheaper valuations than U.S. shares, despite outperforming domestic stocks in recent years.
Ben Inker, director of asset allocation strategy for the investment management firm GMO, notes that foreign stocks (minus Japan) are sporting a price/earnings ratio of 15.5 based on trailing 12-month earnings. Meanwhile, they are yielding around 3 percent in dividends. By comparison, the S&P 500 index of U.S. blue-chip stocks has a P/E of almost 21, says Inker, with a meager dividend yield of 1.7 percent. He adds that emerging markets are even cheaper than those of developed foreign economies, with a P/E of only 12.
While Europe's stock markets have outperformed the United States' recently, earnings in the Eurozone are expected to slow this year as the stronger euro cuts into exports--and profits--of European-based multinational firms trying to sell to the United States. The gross domestic product in the Eurozone, for example, is expected to grow only 1.7 percent this year. Last year, European GDP growth was forecast at 2.2 percent for 2005.
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