Out-Of-Sync Markets

Investors out to capitalize on diverging economies must cast their nets with care

Forget all the talk about a single global economy. Markets around the world, which rarely move in lockstep, are diverging sharply, investment strategists say. Credit independent-minded central bankers. While the U.S. ponders higher interest rates to cool its growth, for instance, Japan is only now surging. Fast-growing Asia and slower-growing Latin America are likely to decelerate, too, but Europe is expected to show modest gains.

Yet consider that one of the best-performing stock markets so far this year is Hungary -- up 19.35% -- and the worst is Thailand -- down 19.14%. "The world economy is a lot more desynchronized, more out of step than in step," argues Michael J. Howell, managing director of CrossBorder Capital Ltd., an investment advisory firm.

Investors who want to capitalize on the differences need to cast their nets wide -- and selectively -- for markets and companies that still have juice in them. Japan and other parts of Asia, along with lesser-plumbed nations in Europe, have an edge as the other regions slip into lower gears, strategists say. Even as Chinese leaders tap the brakes on their superhot growth rates, the country's importing frenzy should still help Japan's economy chug along at better than a 3% annual growth rate this year. And, while Europe's less robust recovery continues, some bargains may be found in corners such as Austria or Sweden, whose micromarkets already are outpacing their bigger neighbors.

Asia has been drawing the most notice among jittery investors lately. China's once-skyrocketing H-Share market -- mainland Chinese stocks that trade on the Hong Kong bourse -- is down 17.1% this year amid fears that growth could slow. But the country's insatiable hunger for commodities won't dry up altogether, so some investors are looking at plays such as Australian-British mining outfit BHP Billiton (BHP ). The company is "so diversified that it is lower risk but still benefits from the Chinese trend," says Paul H. Blankenhagen, portfolio manager with Des Moines-based Principal Global Investors, a $122 billion asset-management unit of the Principal Financial Group.

Few investors are worried about a slowdown in Japan anytime soon. Its surging economy has outpaced the U.S. in recent months, delivering hefty 40% gains to stock buyers in the past 12 months. Some choice names have done better still: The share price for Toyota Motor Corp. (TM ) has leaped more than 50%, while longtime laggard Mitsubishi Tokyo Financial Group (MTF ) has seen its share price double. "Japan's economy is picking up -- finally," says Brian Gendreau, a managing director and market strategist at New York research firm Heckman Global Advisors LLC. "I just don't see any backsliding on the horizon. What we're seeing is a return to normality."

With Japan's corporate titans recovering, so are the bankers, as financial behemoths including Mitsubishi Tokyo and Sumitomo Trust & Banking Co. write off bad loans and extend fresh financing to healthier companies. But the most popular investments are Japan's export-oriented powerhouses such as Sony (SNE ), Canon, (MC ) Nissan Motor (NSANY ) Co., and Matsushita Electric Industrial. Since taking over in 2000, Matsushita CEO Kunio Nakamara has closed or streamlined dozens of factories, cut the domestic workforce by 20%, shifted more production to China and introduced high-end digital goods such as camera phones and flat-screen televisions. Overall, Japanese companies "are first in their global classes," says Joseph Quinlan, a market strategist at Banc of America Capital Management (BAC ), the bank's New York asset management arm.

There are solid stock picks even in regions where growth is lagging. Economists expect Latin America's growth to slow from 4.3% this year to 3.7% next year. And Brazil's benchmark stock index is down 9.53% so far this year. But that country's top airplane maker, Embraer -- Empresa Brasileira de Aeronáutica -- is not likely to be caught in the downdraft. Regional jetmaker Embraer, which Quinlan calls one of Brazil's "great multinationals," has seen its price in American depositary receipts (ADRS) climb from about $20 a year ago to above $36 in January before sliding to about $27 now. The consensus target for a year out: about $35.


Similar global top performers dot Europe. Investment advisers single out Credit Suisse Group (CSR ), the big Swiss bank that has rebounded from past troubles and is poised to reap fees from worldwide mergers and the growth in private banking. At about $35 an ADR now, the bank is $5 below its February high, and analysts expect it to top $44 in a year. Another European standout, Swedish telecom giant Ericsson (ERICY ), trades at about $28, or $4 below analysts' yearlong target. Other promising names: British-Dutch consumer-goods maker Unilever Group and German chemical company BASF. Their stocks should shine, driven up by worldwide consumer spending, which is growing across Asia and could be helped by rising employment in the U.S., even as Europe muddles along.

Investors who don't have the time or resources to follow individual companies need not feel left out. One easy way to tap into the world's biggest and most respected companies is through exchange-traded funds. Like mutual funds, ETFs serve up baskets of stocks, but the ETFs themselves trade like stocks and are quoted on major U.S. exchanges. Barclays Global Investors offers international ETFs, under the name iShares, that are based on national market indexes tracked by Morgan Stanley Capital International. ETFs are "a good way for individual investors to get exposure to international markets," says ING Investments portfolio manager Philip A. Schwartz.

Want to get a quick read on how markets in Germany and Sweden compare, for instance? The iShares fund for Germany has risen from about $13 a share last September to about $16 now -- though much of those gains came from a stronger euro, which translated into bigger dollar gains. Sweden's market would have been an even better bet for dollar-based investors, since its ETF rose from $13 to $17 in the same stretch. Austria's would have been better still, since it climbed from just $11 in September to above $16 now.

Plumbing foreign markets is not easy, but investors may find the gains worthwhile. Despite slowdowns in some corners of the world, global growth overall is now "probably the strongest it has been in 20 years or so," says Barclays Capital Inc. (BCS ) market strategist Laurence Kantor. He expects world growth to hit 5% this year, the highest rate since 1976. Even with the uncertainty triggered by war, rising interest rates, and hikes in oil prices, careful global investors can still find their way to good returns.

By Joseph Weber in Chicago, with Brian Bremner in Tokyo

— With assistance by Brian Bremner

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