A World Of Money To Be Made
Like many vacationers in Jordan, Leila Heckman found herself enthralled by the Roman ruins at Petra. But Heckman, Salomon Smith Barney's managing director for global asset allocation, was equally intrigued by the Jordanian economy. How will Jordan's new King Abdullah Bin al-Hussein handle soaring joblessness? she mused. Will he expand the tiny economy? Just how big are the savings pools Palestinian immigrants are bringing with them?
Her questions on the Jordanian economy won't prompt Heckman to rate the tiny Amman stock market--up 5% this year, in dollars--a buy. At least, not yet. But after the past few years put globalists to shame as the Dow Jones industrial average raced past almost every other equity index on the planet, Heckman is beating the drum for international investing with renewed vigor. In Asia, Latin America, and other markets, says Heckman, taking a break from her Jordanian desert trip recently to chat, "valuations look very attractive. It could be a very good time for investing outside the U.S."
Indeed, despite global markets' underperformance, there is still a case to be made for investing worldwide. International markets aren't moving in lockstep with every one of Wall Street's ups and downs, so global investing remains a good diversifier for your portfolio. Moreover, the fact that many markets remain out of favor at the moment increases your odds of earning capital gains over the long haul. Many pros view Europe and Japan as pricey right now. But they believe stocks in Singapore and South Korea, where economic tumult last year sent investors fleeing, now offer opportunities, as signs of a turnaround have begun to appear. In South Korea, electricity use is surging again, a sign that industries may be on the mend. "Asia is definitely recovering," says American Century Funds portfolio manager Mark Kopinski.
PICK A PRO. There are an increasing number of ways to invest overseas. Many brokers deal in foreign companies' shares traded abroad. Or you can buy American depositary receipts traded on U.S. markets. But if you don't have the time or resources--even with the Net--to follow the latest earnings announcement or corporate restructuring, plenty of mutual funds will do the spadework for you. Salomon Smith Barney analyst Michael Porter, for one, thinks the closed-end Templeton Vietnam & Southeast Asia fund, trading at 20% under its net asset value, offers especially good prospects. Other pros, however, favor investing via broadly based open-ended funds, such as the $1.7 billion Acorn International, which troll the world for modestly capitalized companies that may escape the average investor's eye. "If you try to pick individual stocks outside the U.S., you're going to be disadvantaged relative to the professionals," counsels Acorn manager Leah Zell.
To be sure, that's not a guarantee you'll make a bundle in a hurry. J.P. Morgan Global 50, an open-ended concentrated fund which tries to focus on the 50 best stock ideas worldwide, is up only about 4% since its inception last June. "It was launched at an inopportune time," admits manager Shawn K. Lytle. But lately, Global 50 has been surging amid Europe's takeover binge.
Companies perking up the fund include France's Paribas and Vienna-based Bank Austria. Paribas recently announced a merger with rival Societe Generale, only to find Banque Nationale de Paris bidding for them both. Bank Austria, meanwhile, is reaping the cost savings of its 1997 merger with Creditanstalt, another Viennese lender. Lytle is also high on Philips Electronics and ST Microelectronics, Europe's No. 1 and No. 2 chipmakers, respectively. He argues that the semiconductor market is bottoming out and that the Europeans' price-earnings multiples are cheaper than that of Texas Instruments. Based on estimated 1999 net income, TI trades at a price-earnings ratio of 35, while ST fetches 32 and Philips, which has been held back by its huge consumer-electronics unit, is only 21. Among Lytle's picks outside Europe: Argentine oil and gas producer YPF, which is benefiting from rising crude prices, and Japan's Yamanouchi Pharmaceutical, with its fat pipeline of new drugs.
NIKKEI GEMS. As Japan's Nikkei stock average has climbed 8%--in dollars--in 1999 amid plunging interest rates and hopes for economic recovery, some other mavens have grown more wary. "We're not especially optimistic on the whole Japanese market," says T. Rowe Price portfolio manager David J. Warren. But that doesn't mean he's fleeing. Claiming there are still "more things to buy there," Warren is homing in on lesser-known names such as retailer Ito-Yokado, which has preserved profit margins in the face of economic distress.
Meanwhile, other managers are looking for Asia recovery plays among the region's trading partners. Merrill Lynch strategist Douglas Wilde, for one, argues for taking a look at Australia, even though Sydney's All Ordinaries index is hovering near historic highs. Even so, Australia's top companies as a group trade at an estimated p-e of just 19, compared with 24 for those in the U.S. "There's less downside risk in Australia than elsewhere in the world," says Wilde. His favorite way to tap into Australian action is via World Equity Benchmark Shares (WEBS), open-end country index funds that trade in U.S. dollars on the American Stock Exchange. Aussie WEBS are up 8% in 1999.
Although Asia appears to be mending, South America is still suffering. But that's not stopping intrepid investors. Lytle likes Tele Norte Leste, the local phone company in Brazil's Amazon and eastern regions. Its ADRs are down 26% since their high last November, but Lytle argues that Brazil's recent currency devaluation was less devastating than expected, and that huge demand for phones will pay off in profits over two to three years.
Chile is also attracting investors who think copper may rebound, while still other plays on firming commodity prices are available in Africa. Salomon Smith Barney analyst Porter likes three closed-ends: the Africa Investment and Southern Africa funds and the Chile Fund. Closer to home, Salomon market strategist Brian Gendreau argues that Mexico's soaring market, up 47%, in dollars, in the last six months, has room to run because its exports feed the U.S. market even as it remains a safe haven for Latin American fund managers.
Playing sectors can be a good idea in developed markets, as well. For instance, Credit Suisse First Boston European equities head Francois Langlade-Demoyen says there will be more gains in the Continent's consumer cyclicals, particularly in leisure, media, retail, services, and building materials. His choice picks include France's Accor, the Swiss employment services firm Adecco, and the expansion-minded Dutch retailer Ahold, which lately has ventured offshore to seek out bargains in the U.S., such as the East Coast's Pathmark grocery chain. Says Langlade-Demoyen: "The consumer remains the key to economic growth within Europe."
DON'T TIME IT. Other investment themes are winning fans as well. Take Acorn's Zell. She likes outsourcing companies, such as Canada's Celestica, a contract electronics manufacturer, and Serco, a British company that maintains military bases. Italian banks and Dutch money-management firms also have caught Zell's eye as trading in securities grows on the Continent.
The one thing many investment pros counsel against is trying to time global markets--there are too many variables that can make such an approach hazardous. Instead, they advise investing for the long haul in several promising areas, adjusting allocations occasionally as needed. Michael A. Duffy, manager of Vanguard's Global Asset Allocation fund, follows that approach. He is heavy on stocks from Germany, France, Canada, and Japan at the moment, maintaining that low interest rates should stimulate the euro zone, and a similar rise in liquidity will continue to bolster Japanese equities. Whether those arguments will help him beat the Dow in 1999 is anyone's guess. But many pros are arguing that over the longer term, global investing still has a lot going for it.