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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (6033)	4/28/2002 10:27:50 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Finally, a Good Year to Look Offshore--- NASD -- But at these valuations, it has to be the case. By KENNETH N. GILPIN April 28, 2002 The last decade has not been a terrific time to own foreign stocks. From 1992 through 2001, there have been only three years in which foreign stock mutual funds, on average, outperformed diversified stock funds focusing on the United States, according to Morningstar Inc. The most recent was 1999. But so far this year, most foreign markets are doing better than their American counterparts. David Bowers, chief global investment strategist at Merrill Lynch, talked last week about the wisdom of investing money offshore. Following are excerpts from the conversation. Q. In early March, you suggested that foreign stocks were worth a look. Why? A. The most important reason was valuation. The U.S. looked very expensive. We look at a survey of Merrill Lynch fund managers every month, and in February 62 percent said the United States was the most overvalued equity market in the world. Even with the drop in the market since then, and the rise overseas, the United States still looks expensive to foreign markets, especially emerging markets. Q. Are you worried about the United States market? A. No, and that is why we did not go to an underweight position. Until and unless you can make a long-term bear case for U.S. financial stocks relative to the rest of the world, and a bear case for consumer staples and health care, history would say you should not rush to go negative on America. And the performance of what is happening in the financial sector is very, very important. Over the last *25 years, whenever international stocks have done better than American stocks, international financial stocks have done better than U.S. financials.* Q. What are the prospects for Japan? A. People are shocked that Japan has outperformed the U.S. so far this year. It is a really interesting situation. We think there are medium-term risks in Japan, but in the short term, if there is any recovery internationally, Japan is a warrant on the synchronized global recovery. But that is a tactical call, not a strategic investment. You don't want to own Japan, you want to rent it. Q. What are the prospects for Europe? A. I can see how Europe might benefit as a default call: the United States is too expensive, Japan is too risky, emerging markets are too small. But I don't find it an interesting argument. There may be some currency benefit, but Europe still has to go through corporate restructuring and other supply-side changes. With elections in France and Germany this year, it is hard to see how you are going to get radical change before those are over. Q. Why do you find emerging markets appealing? A. Emerging markets are an alternative asset that is competing with technology stocks for risk capital. Very few people are making the direct comparison, but we think it is valid. In terms of risk and return, emerging markets and the Nasdaq are similar marketplaces. Ask anybody who has invested in Nasdaq over the last couple of years. And emerging-market valuations are the most attractive out there. Emerging markets are still trading at only 11 times earnings, versus about 90 times for the Nasdaq composite index. What about currency risk? That is nothing compared to what has happened to technology stocks over the last two years. We think emerging markets offer opportunity in the short term and the long term: it could take three to four years before the valuation gap between emerging markets and the Nasdaq is substantially narrowed. Q. Are we near the bottom of the cycle for technology stocks? A. Our fear is that technology is a long workout. You may get some bounces, but it will be another two to four years before these problems are worked out. This is the big talking point: How much damage has been done to balance sheets, and how much do I want to pay up for them? And you have to distinguish between earnings and profitability. You can get a rebound in technology earnings, but balance sheets take a long time to work out. Going forward, returns on capital are going to be quite low for technology stocks. Until we see some of those problems addressed, those who have been investing risk capital in the United States might think about diversifying elsewhere. Q. What would make you feel better about the prospects for United States markets? A. If valuations in the United States came down, if the capital spending cycle picked up again and if earnings picked up strongly. The United States needs to prove that its economic miracle is working. There is still a lot of latent optimism about earnings growth in this country. That could be the case. But at these valuations, it has to be the case. nytimes.com