Is Global Investing Dead?

03/20/2008 12:00 am EST


Howard Gold

Founder & President, GoldenEgg Investing

For years US investors have been told to "go global" in search of stronger growth and higher returns. And Americans obliged by pouring billions of dollars into international stocks, mutual funds, and ETFs.

But now the case for overseas investing appears to be unraveling.

Since global markets topped out late in 2007, the much-maligned US-the very source of the subprime-mortgage meltdown that has racked credit markets worldwide-has dramatically outperformed some of last year's hottest markets.

The blue-chip Dow Jones Industrial Average and the large-cap Standard & Poor's 500 both have lost much less than their major European and Asian counterparts of late (see Table below).

This suggests that the five- or six-year run in which foreign bourses routinely thrashed the S&P and the Dow has ended.

"The international [outperformance] was a great story, but it's over," says Alec Young, S&P's international equity strategist.

International markets are down 20% across the board in local currencies, says Young, so the weak dollar doesn't even factor in. And over the past few months, S&P has been steadily reducing its recommended exposure to international stocks.

The numbers tell why.

Despite big falls from their October all-time highs, the Dow and the S&P are among the world's best performing major markets-Brazil, Mexico, and Canada, all of which happen to be in the Western Hemisphere.

In fact, despite all the moaning and groaning on Wall Street and in the financial media, those big US indexes have still not crossed the 20% decline that technically signals a bear market.

And yet some of last year's biggest winners-Germany, India, and especially China-are deep in bear market territory.

Despite a strong currency and a fairly robust economy the German DAX index is down 21% from its high, in the same range as that of its querulous neighbor, France.

And in Asia, whose century we supposedly inhabit, it's been a bloodbath.

From India, which was just about to dethrone Silicon Valley as the world's low-cost high-tech capital, to China, the world's next economic superpower, to Japan, whose "lost decade" US policymakers are now allegedly powerless to avert, investors have lost not only their shirts, but also their shoes, their socks, their belts, and their pants.

These markets have racked up declines ranging from 28% in Mumbai to a sickening 38% in Shanghai-so far.

Meanwhile, those of us who've been backward enough to stay in the "been there, done that" US stock markets have taken relatively modest hits, with returns comparable to those of last year's global superstar, Brazil.

And that comes amid a financial crisis even former Federal Reserve chairman Alan Greenspan dubs "the most wrenching since the end of the Second World War." Housing prices have plummeted, consumer spending and employment have tumbled, oil prices topped $100 a barrel until Wednesday, and gasoline approaches $4.00 a gallon.

Whole swaths of the credit markets are frozen, and even the most worthy borrowers have to jump through hoops to get loans. And Bear Stearns, the fifth largest investment firm in the US, just went belly up.

Clearly, to use Mr. Greenspan's words again, this must be a conundrum.

Either the equity markets are in complete denial and US markets will soon face a major crash, as my friend Jon Markman has been writing on MSN Money.

Or maybe, just maybe, great US companies that are not homebuilders or financials or purveyors of overpriced consumer junk are quietly selling excellent products and services around the world and are still making good money.

Despite everything, the US economy is a giant with a lot of advantages that may be helping its markets now.

US stocks now represent 41.3% of world stock market capitalization, up from 40% at the end of the year, according to Alec Young.

Meanwhile, the bloom is off the rose in China. Hong Kong's Hang Seng index fell 3.5% overnight, and the Shanghai Composite Index has fallen below 4,000 after topping out over 6,000 last October, when we recommended selling Chinese stocks.

Inflation is rising, threatening to puncture China's growth bubble amid food and fuel shortages and an energy squeeze.

And as the Beijing Olympics approaches, a rebellion has broken out in Tibet and in neighboring provinces as Tibetans look for some autonomy and religious freedom. China's answer: crush the dissenters and blame the Dalai Lama for everything.  

These events may help crack the finely wrought veneer the government has crafted in its effort to make China shine in the eyes of the world. Ultimately it may remind investors that this is very much a dictatorship whose economy is still firmly controlled by the Communist Party.

So, what lessons can we learn?

First, nothing lasts forever in investing-not tech stocks in the 1990s, housing in the early part of this decade, or commodities now. International stocks, especially emerging markets, had a great run, but now, as Young says, may be their time to revert to the mean and lag ours for a while.

Second, despite its many naysayers, the US ain't dead. Over the last couple of years I've observed a certain schadenfreude-taking joy in other people's trouble-in the downright glee with which some commentators have viewed the recent fall of the US dollar and underperformance of US stocks. But now investors may realize that the US economy is much more resilient than others in times of crisis like this.

Third, every boom and bubble has its own rationale, but you should always put it in perspective. Nine out of ten dollars by US fund investors went into international equities in 2006, and pundits such as Fidelity's Bruce Johnstone  until recently advised investors to put as much as two-thirds of their equity into overseas stocks.  I'd say 20% (no more than 5% in emerging markets) looks about right now.

Yet even that's a lot more international exposure than Americans had a decade ago. The truth is, the world is a smaller place and many economies and markets are becoming big new players on the world stage. Emerging markets especially will have much bigger ups and downs, but in the long run they should show bigger growth.

Let's not sell the US short, but investors today need a healthy dollop of international stocks, too, along with bonds, cash, and commodities. Just not the whole basket.

Global investing is dead. Long live global investing.

Howard R. Gold is executive editor of The opinions expressed here are his own and do not necessarily represent the views of InterShow.

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