Look Out, Dow, Here Comes Europe

American investors seeking a hedge against the volatile stock markets at home might do well to look eastward - across the ocean to Europe.

Major European markets have been rolling upward this year, outpacing the Dow Jones Industrial Average (see chart).

And despite an August dip in tandem with US indexes, Continental Europe looks particularly attractive in light of currency turmoil that has spread throughout Southeast Asia.

"In local-currency terms, the European markets have done brilliantly," says Peter Lamaison, who heads American Express Asset Management, London. He expects continued gains for European markets - particularly on the mainland - going well into next year.

Based on local currencies, the main market indexes are up 18 percent in Britain, 23 percent in France, 37 percent in Germany, and 32 percent in the Netherlands.

Mr. Lamaison does not believe the Asian brouhaha will affect European stock markets.

Slightly better economic growth has been driving the markets, following several years of tepid growth.

'A long way to go'

"European economies are slowly improving, but there is still a long way to go," says Darren Rawcliffe, an economist at the London office of DRI/McGraw Hill, an economic consulting firm.

Traditionally, investment professionals encourage individuals to diversify their assets to include overseas securities. Walter Frank, chief economist at Agora Financial Publishing in Baltimore, recommends that conservative investors hold at least 35 percent of their portfolio in international investments.

In addition to Western Europe, this year's star markets include Mexico, Brazil, Hungary, and Russia.

Like most world markets, European markets turned southward in August. But Europe still managed to do better than other regions. Norway was the top-performing developed-country market, up 3 percent. While European markets were off 6.8 percent in August, Asia's Pacific markets were off 11.9 percent.

David Shulman, chief strategist at investment house Salomon Brothers, sees the recent market drop in Europe is part of a global downturn.

"The data suggest a global correction in stock prices is under way," he says. The Bundesbank, Germany's central bank, will likely boost interest rates some time this year to offset higher inflation, he says. Higher rates could work again additional market gains throughout Europe, Mr. Shulman says.

Lamaison, however, believes that even with higher rates in Germany, European markets look promising for the long haul - that is, going into the next century.

Corporate restructuring

Continental Europe is now beginning the corporate restructuring that occurred in the US during the 1980s and early-90s, he says. Downsizing will eventually mean higher profits.

Among the European firms that he likes are Shell (United Kingdom and the Netherlands), Unilever (UK), and Philips (Netherlands).

There are four ways of buying into overseas securities:

* Buy the American depositary receipts of individual companies, which are listed on US stock exchanges. ADRs can be purchased directly through a broker for a small commission.

* Buy into an open-end mutual fund that invests in the countries or regions you want to target.

* Buy into a closed-end mutual fund, purchased through a broker. Unlike open-end funds, these have a limited number of shares available and trade like stocks. They are sold at either a discount or premium to the value of the stocks they own, depending on their popularity and success.

* Buy US companies with a heavy presence in Europe, such as Coca-Cola, Ford, or Boeing.