"Despite foreign stocks' long run, many Wall Street strategists and financial planners are telling clients to increase their exposure to international equities. Driving the new recommendations are expectations for continued strong growth overseas and pessimism about U.S. stocks' returns, which could be crimped by rising interest rates and concerns about a pickup in inflation. ... Standard & Poor's investment-policy committee raised its recommended international stock allocation to 20% from 15% in late October. J.P. Morgan Private Bank, a unit of J.P. Morgan Chase & Co., boosted its suggested holdings of foreign stocks to around 33% from 20% about two months ago ... More than $82 billion has flowed into international and global stock funds so far this year, already topping last year's total, according to AMG Data Services. By contrast, less than $34 billion has flowed into U.S. stock funds in 2005, down from $122 billion for all of 2004 ... The recommendations for more international exposure represent a turnaround from just this summer, when a number of financial strategists were telling investors to reduce overseas holdings in part because the dollar was gaining strength against other major currencies, which hurts returns for U.S. investors. The dollar is up nearly 15% against the euro and the yen this year, following several years of dollar declines. Still, many analysts expect the dollar's strength will be short-lived."
----(The Wall Street Journal - "Foreign Stocks Get New Push" - 11/8/05)
Schaeffer's addendum: I found this piece to be of particular interest, as the dollar was rallying to a 52-week high as I was reviewing it. The fact that the flow into international and global stock funds this year has already exceeded last year's total and is more than double the flow into U.S. stock funds is a red flag, but then again last year's flows into the overseas arena were also of the red-flag variety.
As we all know, fund flows into momentum sectors can lead to a self-fulfilling "virtuous circle," in which strong flows lead to strong price action, which encourages yet more flows and so on. But the fly in this year's ointment is the strength in the dollar- strength that I might add is all the more impressive given the $100 billion annual rate of flows into overseas mutual funds.
It is never clear exactly when a momentum sector is going to top out and then experience the inevitable painful plunge - we can only look for clues. The huge fund flows are a clear indication that we are not early in the game of strong relative price action for overseas markets. And I see the fact that the premise of inevitable dollar weakness - which spawned this major shift into overseas investing - is now all but shattered as an additional clue indicating we're in the very late innings of this game.
A final clue is the "throw caution to the wind" sentiment reflected in this article. Can you imagine the following lead sentence at any time over the past year or two: "Despite crude oil's long run, many Wall Street strategists and financial planners are telling clients to increase their bullish positions in energy stocks and crude oil futures?"
Bernie Schaeffer |
