Where in the World to Invest

Europe and Asia offer a handful of sectors where modest gains may be found.

Foreign stocks have been a disaster for American investors for years. But that may change soon. Prices, particularly in Europe, are so low that bargains are easy to find. "The [European] markets have priced in deflation and the return to a 1930s-style depression," says Haydn Davies of London's Barclays Global Investors Ltd. "But that's not going to happen."

Many high-quality European companies are going for a song. Steve M. Russell, a pan-European strategist at HSBC Securities Inc. in London, says traditional stocks such as pharmaceuticals, support services, and utilities are the best place to prospect. "It's now time to look beyond defensive, safe investing," he says. Companies that are cutting costs, focusing on core businesses, and fixing strategic mistakes look attractive--among them German utility E.ON (EON ), and its French counterpart, Suez (SZE ), which have gained market share thanks to deregulation. Shares of drugmakers such as Switzerland's Novartis (NVS ), Germany's Schering (SHR ), and Britain's GlaxoSmithKline (GSK ) also are expected to rise. Each has important new drugs, such as Schering's hormone-replacement therapies Betaseron and Yasmin.

And 2003 promises to be a good year for support services such as recruitment firms and temporary agencies. That may seem odd, given the sluggish economy and rising unemployment in Germany and several other countries. For years, however, outsourcing has been growing in Britain and is fast spreading across the Continent. Besides, many companies that have laid off staff are expected to start hiring part-time or temporary help later in 2003. That bodes well for Switzerland's Adecco , the world's biggest recruitment agency, and its Dutch rival, Randstad Holding.

Look for European insurers to regain some of their luster in 2003, says Udo Rosendahl, who heads European equities at DWS Investments, a large German mutual-fund manager. They took a beating in 2002, when the bear market ravaged investment portfolios and their profits were hit by huge claims from floods in Central Europe and the attacks on the U.S. in September, 2001. Since then, nonlife premiums have edged up, meaning that companies such as Italy's Assicurazioni Generali (GNASF ), one of Europe's most conservative underwriters, and Germany's giant Allianz (AZ ) should be in a good position to boost earnings.

EASIER AFTER EASING?

Companies whose shares usually rise when interest rates fall should also outperform the market in 2003. On Dec. 5, the European Central Bank cut its key rate by 50 basis points, to 2.75%, and is expected to trim it by another 50 basis points in the next three months. That should give the Continental real- estate market a boost and encourage consumer spending. Stocks that will benefit, analysts say, include German real-estate company WCM and Belgian retailer Delhaize Group (DEG ). But many bank stocks, which normally do well when rates decline, will continue to languish because of slow economic growth and the rising tide of corporate insolvencies.

In Japan, bank stocks are also largely a no-go zone. With bears ruling the stock market and with the economy heading south, the best bets are a handful of multinational companies that are globally competitive with strong balance sheets. HSBC consumer-electronics analyst Hideki Watanabe likes Matsushita Electric Industrial Co. (MC ) "for its restructuring; its highly competitive DVD recorders, video cameras, and other products; and its leads in developing business in China." HSBC auto analyst Christopher Richter likes both Honda Motor Co. (HMC ) and Nissan Motor Co. (NSANY ), thanks to brisk sales in the U.S. He expects the U.S. market share of Japanese auto makers to grow from 27.4% to 32% in the next few years.

Elsewhere in Asia, Samsung Electronics Co., the world's largest memory-chip maker and the third-largest mobile-phone maker, is expected to remain South Korea's star in 2003. That's after a 27% jump in its stock through Dec. 17--while the benchmark Kospi Index rose just 2%. Analysts are predicting a net profit rise of about 10% in 2003, from $6.2 billion in 2002, which should keep the stock moving up.

In Hong Kong, Ajay Kapur, head of Asia-Pacific regional strategy research at Salomon Smith Barney, likes Swire Pacific Ltd. (SWRBY ), the property and retail conglomerate that is also the largest shareholder in Cathay Pacific Airways Ltd. He says Swire's stock is trading at just 0.7 times book value, and has an 8% return on equity. Another Hong Kong favorite is retailer Esprit Holdings Ltd. (ESHDF ) Vincent Strauss, chief investment officer for Paris-based Comgest, has been loading up on Esprit shares because of its growing clout in Western Europe. Esprit's price-earnings ratio of 18, based on 2002 earnings, is half that of Swedish clothing retailer H&M Hennes & Mauritz, for example.

SIMPLE PLEASURES

Two stocks that leverage China's fast growth catch Strauss's eye: Hong Kong-listed Zhejiang Expressway Co., a toll-road operator that benefits from the surge in trade-related transport around Shanghai, and Beijing Datang Power Generation Co., the largest independent power producer in northern China. "We like boring companies that make good products," he says.

At the end of the day, though, strategists agree that 2003 is unlikely to be a bumper year. That's why there won't be a rush of foreign money into European and Asian stocks. "There is no reason for euphoria," says Jens Wilhelm, manager of Union Investment Privatfonds, part of Frankfurt's Union Investment, speaking of Europe. "But in the coming year, we do expect moderate growth in profits." So investors may not get the big market recovery they're looking for in 2003, but after several bad years, it may be time to take another look overseas.

By David Fairlamb

With Brian Bremner in Tokyo, Frederik Balfour in Hong Kong, and Moon Ihlwan in Seoul

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