If the following WSJ article is accurate (and I have no reason to think it isn't), then I'm worried about the upside to investing in non-USA stocks and mutual funds. When everyone piles into the same boat, that boat has a natural tendency to sink. Perhaps it's some law of physics or something like that... <g>
online.wsj.com
U.S. Investors Have Been Buying Foreign Stocks at a Record Pace
By CRAIG KARMIN
Staff Reporter of THE WALL STREET JOURNAL
August 4, 2004; Page A1
U.S. investors are buying foreign stocks at a record pace, lured by international markets' strong returns in U.S. dollar terms and encouraged by their investment advisers to diversify globally.
U.S. net purchases of overseas shares jumped last year to a record $72 billion, according to the U.S. Treasury Department, easily eclipsing the former mark of $63 billion from 1993. This year, appetite for foreign stocks appears to be even greater: Through May, U.S. investors bought $36.7 billion more in non-U.S. stocks than they sold, which puts them on pace to be net buyers of $90 billion for the year -- a 25% rise over last year's purchases.
"U.S. investor preference for foreign stocks has never been stronger than in the past year and a half," says Joseph Quinlan, chief market strategist for Banc of America Capital Management.
This foreign interest comes during a time when some argue that momentum from the U.S.-led global recovery is shifting overseas. Two years ago the U.S. was doing the most to stimulate its economy and markets. The Federal Reserve was cutting interest rates, government was cutting taxes, consumers were refinancing their mortgages and companies were rebuilding their balance sheets. The cumulative effect helped drive last year's global stock market rally.
"But if the U.S. led the global economy out of its slowdown, it's hard to see how much more you can expect on the upside" from the American engine, says Christopher Smart, director of international investment at Pioneer Investments in Boston. "There may be more opportunities ahead in Europe and Japan."
While the Treasury numbers reflect purchases -- of stocks and American depositary receipts -- by all kinds of investors, including pension funds and institutions, other data provide corroborating evidence that individuals are looking abroad, too. (ADRs are securities that represent foreign shares and are traded in New York.)
Indeed, the flow of money into foreign-stock mutual funds aimed at individuals is increasing at a faster rate than that of new money into U.S.-stock funds, according to AMG Data Services, a research company that tracks mutual-fund cash flows. AMG says overseas equity funds saw inflows of more than $31 billion this year through late July.
"At this pace, international fund flows could possibly double 1994's record year" of $34 billion, says Robert Adler, president of AMG. He adds that among U.S.-based funds that invest predominantly overseas, those focused on Japanese stocks also have been hot, receiving $4.4 billion in new money through July 28. That nearly matches their total flows for all of 1999, their best year ever.
Fund managers say this new enthusiasm reflects a confluence of factors that have sent investors shopping abroad. The dollar, though up modestly in 2004, has been in an extended bear market for much of the past couple of years. That is making profits from overseas stocks look better when translated back into the U.S. currency. The Dow Jones Euro Stoxx 50, for instance, gained 16% last year in euros but 39% in dollar terms.
U.S. investors' burgeoning fondness for foreign markets also comes amid fears that the economic recovery here is stumbling -- or at least pausing -- even as other economies pick up speed. At the same time, overseas investors' interest in the U.S. has been waning. That has significant implications for the U.S. and its yawning current-account deficit.
Nearly half of this year's U.S. foreign investments were made in Japanese stocks, reflecting a popular belief that Japan's economy is on the rebound. Global portfolio managers also argue it is a disadvantage to limit a portfolio to the U.S when many of the world's best companies and fast-growing economies are found abroad.
"It pays to look more closely at other parts of the world, like Asia, where you have large chunks of the world's population joining the global economy," says Steve Cucchiaro, president of Windward Investment Management, a Boston money manager and investment adviser. Over the past two years, he has doubled his firm's foreign exposure to 18% of its total holdings.
The U.S. represents the world's largest pool of investment money, and any shift in its emphasis toward foreign stocks will be closely watched overseas. American investors are already an important buyer in some major markets like Tokyo and could provide a significant lift to other foreign markets if their interest continues to rise.
Still, at the moment, overseas investments are but a small fraction of the money Americans spend on domestic shares. While it's difficult to get a total figure for that activity, domestic mutual funds that invest in U.S. shares have almost $3 trillion in assets, according to Lipper Inc. In other words, even though we're buying billions overseas, we still have billions of dollars more tied up in home markets.
In addition, U.S. investors have been net sellers of $17 billion in foreign bonds over the first five months of this year. That could stem from several factors, including a simple preference for stocks over bonds and the fact that many foreign bonds are priced in dollars, so there is no weak-dollar advantage. Japanese bonds offer paltry interest rates, while emerging-market debt is high-yielding but too volatile for many investors.
Moreover, overseas investing often comes with additional risks and costs, from different and sometimes weaker corporate governance and poor disclosure to different and sometimes higher trading fees. If the dollar has a big rally, then returns in overseas stocks would be lower when converted back to dollars. And in an increasingly globalized economy, the performance of the U.S. stock market and most major foreign markets have become more closely correlated, so that in recent years the diversification benefits of buying foreign shares have been muted.
Yet analysts say it's impressive that the popularity of overseas shares can rise at a time when most foreign markets, while doing better than the U.S. market, aren't exactly lighting it up: While the Dow Jones Industrial Average is down a little over 3% so far this year, the Dow Jones Stoxx Index of 600 European companies is up just over 3%, Tokyo's Nikkei Stock Average is up more than 4%, and the Dow Jones World Emerging Market Index is down almost 4%.
Recent interest hasn't been limited to one market or region. Excitement over China's locomotive economy last year helped stoke interest in Asia-region stocks (meaning Asia excluding Japan, which is considered its own animal). These purchases soared to a record $26.5 billion, or 37% of all foreign purchases.
This year, concern about China's effort to slow its economy has dulled some of the enthusiasm for Asian companies and other emerging markets, like Brazil, that export commodities to China. But fresh attention to European shares, which account for 39% of foreign purchases, and Japanese stocks, which make up 46%, has more than compensated, so that total foreign purchases continue to climb.
By some Wall Street estimates, European stock valuations are on average 15% lower than their U.S. counterparts, and Asian stocks are about 25% lower than U.S. peers, based on the price-earnings ratio. "The risk of foreign stocks underperforming domestic stocks is the lowest it's been for a long time," says Scott Kubie, president of Clarke Lanzen Skalla, an Omaha, Neb., money management firm. "And the opportunity for out-performance looks good."
Mr. Kubie says his funds typically devote 15% of their assets to foreign markets, but that level is now at 30%, as high as it has ever been. He says he has been moving money out of emerging markets and into Tokyo stocks.
U.S. companies have also been indicating that their double-digit profit growth should be slowing by next year. "If you're looking for the most rapid earnings growth in the world, it's in Japan," says Dominic Freud, an international portfolio manager with Oppenheimer Funds in New York.
Write to Craig Karmin at craig.karmin@wsj.com
KJC |
