For Americans, Foreign Stocks Spell Relief

Sure, they're down as much as the S&P, but in dollar terms, they've lost less--and have more upside

Investors seeking a safe haven overseas from the U.S. stock market's turmoil haven't found it this year. So far in 2002, the average foreign stock is neck-and-neck with its U.S. counterpart, both falling by over 16%. That said, U.S. investors who are buying foreign stocks have fared better. Because of a rise in the value of foreign currencies against the dollar, foreign stocks lost less in dollar terms--falling only 9.5%.

While it may be tempting to throw in the towel, that would be a mistake right now. For one thing, foreign stocks are still relatively cheap. "U.S. stocks are generally about 25% more expensive on a price-to-earnings basis than European ones in most sectors," says Ajit Dayal, deputy chief investment officer at Hansberger Global Investors, a Fort Lauderdale-based money-management firm. "Emerging-market stocks in Asia and Latin America are about 35% to 40% cheaper." Analysts also think the dollar is overvalued compared with other currencies. If it slides, that will further boost foreign returns.

Still, in this climate, one has to be a careful stockpicker. Money managers have been increasing allocations to small and midsize European companies, which are cheaper than multinationals and more dependent on local economies than exports. Value stocks with strong free cash flow, little debt, and simple business models are also in style. "Corporate financing is difficult to come by overseas right now," says Bernard Horn Jr., manager of the Quant Foreign Value Fund, which is up 2.3% this year. "But companies with little debt and strong free cash flow don't need external financing to grow."

While stockpicking matters most, country selection is also important. Within Latin America, for instance, money managers are sticking primarily with the largest, safest companies in Mexico because that country's strong ties to the U.S. make it less vulnerable to economic fallout from the currency devaluation in Argentina. And while Asia as a whole has been growing, most experts favor Korea and China over Japan, where growth is sluggish.

The rest of the year may not turn out to be any brighter for foreign stocks. But given how beaten down they are already, now isn't the time to bail.

By Lewis Braham

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