 Global Investing Gets a Boost
By Nancy Zambell, Contributing Editor
The U.S. now comprises just one-third of the world's market capitalization. And in the past few years, global returns handily outpaced those of U.S. issues. But recently -- in spite of all the talk of decoupling -- international markets have suffered right along with our domestic exchanges.
But last week, global as well as U.S. markets got a much-needed spurt of adrenaline with a series of rallies. However, I'm not yet ready to bet that the next bull run is around the corner, as earnings reports have been decidedly mixed, both in the U.S. and throughout the world. And since, traditionally, growing earnings are a pretty good predictor of future investment gains, we may not yet be ready to breathe a sustained sigh of relief.
In the last quarter, some U.S. companies with wide international exposure, such as Traveler's (NYSE: TRV) and Whirlpool (NYSE: WHR), saw substantial income declines, while global companies such as Telecom behemoth LM Ericcson ADR (Nasdaq: ERIC) posted earnings that dropped 70%, and profits at aluminum maker Norsk Hydro (Oslo: NHY.OL) sagged 87%.
On the positive side, international advertising and marketing firm Omnicom (NYSE: OCM) saw earnings rise 11% and PepsiAmericas (NYSE: PAS) upped its guidance, looking for higher growth coming out of Central and Eastern Europe.
Consequently, with earnings reports so mixed, they are most likely not the reason that markets staged rallies. Instead, we can point to tumbling oil prices that boosted bourses around the world.
The FTSE 100, the DAX the CAC40, the Hong Kong, Japan and Singapore exchanges all saw positive gains and have come off their 52-week lows. However, we can not guess just how long this encouraging action will continue. Consequently, it's more important than ever that investors be very choosy when it comes to selecting investments, particularly international issues, which come with these unique risks:
Market: Foreign accounting practices can be quite different than those we are used to in the U.S. Therefore, financial statements can be confusing. As well, investors may encounter difficulty in trading shares in foreign markets, resulting in liquidity issues.
Currency: Because foreign currencies can often wildly fluctuate, the value of investments in foreign dollars can change drastically in relation to the U.S. dollar, and rising inflation can easily wipe out any gains.
Economic and political instability: Many foreign countries have also been affected by economic woes, particularly in the financial sector. As well -- and primarily in third-world countries -- investments may be at risk as a result of political coups and government mandates, such as the nationalization of businesses, and adverse legislative and taxing actions.
Yet, as global barriers to investing continue to disappear, the opportunities to profit from select pockets of superior returns, as well as adding needed diversification, will compel investors to continue to pursue international investments.
Investors can benefit from global diversification in many ways. They can buy multi-national companies like Toyota (NYSE: TM), Intel (Nasdaq: INTC) and Sony (NYSE: SNE), or hundreds of other companies with significant international exposure. Or they can purchase more than 2,000 American Depository Receipts which are traded on U.S. exchanges. Recent ADRs that have posted the largest volumes include resource giant BHP Billiton (NYSE: BHP) and Swiss electronics company STM Microelectronics (NYSE: STM).
But for investors who want to diversify further than just a company or two, the easiest way to go global is to buy exchange traded funds (ETFs) or mutual funds.
Morningstar (http://screen.morningstar.com/ETFScreener/Selector.html) now lists 161 international ETFs and more than 1,000 mutual funds. (http://screen.morningstar.com/FundSelector.html)
Until this past year, global funds and ETFs were the place to be. But the economic decline around the world left investors with some pretty abysmal returns recently, unless they were fortunate enough to be invested in commodities.
The negative returns of so many funds and ETFs have made many investors wary to tiptoe back into the international markets. Yet, long-term, expansion into global markets will be a necessity to keep your portfolio above water. After all, long-term investors realize that market downturns are a natural cycle; the key is to make sure you are buying fundamentally strong investments that can weather down cycles.
Consequently, while the primary goal for most investors is return, I urge you to make sure that your analysis also includes a thorough review of long-term performance, expenses, turnover and management expertise. Additionally, while sector funds and ETFs can be tremendous outperformers during certain economic cycles, they should be kept to a small portion of your portfolios. For most investors, the majority of your holdings should be in widely-diversified issues, such as broad market or international regional funds and ETFs.
Here is a link to the foreign funds that Morningstar currently views as standouts: http://screen.morningstar.com/FundResults.html?preset=ForeignStock
As you can see, the commodity funds are about the only ones that have posted positive returns of late, but wise investors will realize that just a few months' performance is not a long-term predictor, so make sure you delve a little deeper to discover which funds are best-positioned to take advantage when the economic recovery begins, in earnest.
The same goes for ETFs. The following link from MSN lists the top performing ETFs. Again, the highest recent returns were from those which are resource-related.
http://moneycentral.msn.com/investor/partsub/funds/etfperformancetracker.aspx
And whether or not the price of oil and food continues to rise exponentially, history shows us that the commodity and resource uptrends will inevitably collapse and something else will capture the imagination and attention of investors. Those investments -- at this juncture -- are unknown, but investors can position themselves to participate in any new uptrend by making sure their portfolios are adequately diversified into many sectors and countries. That way, you'll get to reap the rewards of new and exciting trends, but you won't be betting the bank on any one sector.
This concludes this week's issue of Financially Fit. We encourage you to visit our website to review past issues of Financially Fit:
http://www.brokeradviser.com/newsletter.cfm
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