It's a good time to be overseas

The world is changing for American investors. In the past decade or so, foreign stocks have become more easily accessible through mutual funds - and, sometimes, more profitable.

"Generally speaking, the rest of the world did better last year [for American investors] than the United States," says David Wyss, chief economist of Standard & Poor's, a New York investment information firm. "Not that the US did terrible."

Many foreign stocks were in a catch-up phase. Some were blessed by high prices for raw materials. Others by a more stable financial or political picture.

Mr. Wyss suspects foreign markets may again offer a better return than the US market in 2006. But that's a prediction, not a certainty.

Behind the world's financial markets lies a rapidly shifting - and risky - economic scene. For example, China probably has just displaced Britain as the world's fourth-largest economy.

But widows probably should not load up on Chinese stocks.

Nor on Russian stocks. Yet who would have suspected 15 years ago that Russia's leader would become president of the Group of Eight (back then, the G-7) industrial nations? Not only that, Russia has been using its swollen oil and gas revenues to repay huge chunks of the foreign debts piled up by the former Soviet Union - debts once regarded as of shaky value.

A few years ago, few foreign business people saw India as a promising market for consumer goods. But last year, sales of such items as microwave ovens, air conditioners, washing machines, VCRs, DVD players, and color TVs were up 12 to 27 percent in that nation.

For most American investors, however, the more likely and conservative choices for foreign investment are the markets of Europe, Japan, and Canada.

Last year, the S&P 500 stock market index - a popular index of American stock prices - rose 3 percent. When dividends are included, the return for an investor reached 5 percent.

US economic and investment growth last year was significantly higher than that of Europe, Japan, and other industrial nations. But foreign stock markets have been slow to recover from the bursting of America's Internet-stock "bubble" in 2000. That's not so true now. In US dollars, S&P's World Index rose 15 percent last year.

The American investor who accepted the risk of a change in the value of foreign currencies and invested money abroad did better than the investor who kept all his money in the domestic market.

"It's a good time to have an 'overweight' internationally," says Wyss. He recommends that investors have 65 percent of their total portfolio invested in corporate stocks, of which one-quarter should be in foreign stocks. The remainder of the portfolio, he says, should be invested in short-term bonds (that is, bonds with maturities of two to five years) and cash.

Many conservative analysts recommend that any money to be invested abroad be put into mutual funds rather than individual stocks. That leaves the difficult stock-selection task to professional fund managers.

Last year, S&P's index of 350 European stocks was up 24 percent. Low interest rates encouraged investors. The European Central Bank raised short-term interest rates modestly in December, to 2.25 percent for the 12 nations belonging to the euro bloc. That's still well below the comparative rate in the US of 4.25 percent set by the Federal Reserve last month.

Citigroup analysts forecast a 15 percent gain in European stock prices this year, notes Stuart Block, an economist with the investment banking firm in London. That assumes the euro area will enjoy a 1.9 percent increase after inflation in gross domestic product in 2006 - a bit better than the 1.4 percent GDP growth in 2005. That's also a little above what economists regard as Europe's "potential" growth rate of 1.75 percent, a number that reckons Europe's population is stagnating.

Japanese stocks were up 43 percent, again from the standpoint of the US investor (taking into account a rising yen).

Latin American stocks did even better, on top of good gains in 2003 and 2004. They were up 51 percent last year. Fears arising from Argentina's financial crisis of 1999-2000 have faded.

Non-Japanese Asian stocks rose 22 percent. Australia's stocks climbed 18 percent. The resource-rich nation benefited from the rise in prices of raw materials as China sucked in the ores and metals necessary to feed an economy growing at a speedy 9.8 percent rate. ("China keeps gobbling up anything it can find," says Wyss.)

Canada, with huge oil, gas, and mineral resources, saw a 25 percent rise in its stock prices - again in US dollar terms.

According to a Wall Street Journal survey, American economists expect US output to grow at an annual rate of 3.5 percent in the first half of this year and 3.1 percent in the second half. But there are perils ahead.

One is the huge deficit in US international payments. The US current account ran about $811 billion in deficit last year, or 6.5 percent of GDP, calculates Mickey Levy, chief economist at Bank of America. So far, foreign central banks and other foreigners have financed that deficit - but with some trepidation.

Mr. Levy expects a "relatively benign adjustment" to ease this problem over time. But he also sees "a potential for an economic hard landing" if the US and creditor nations do not take steps to remedy the situation.

Levy's forecast calls for a 3.4 percent rise in global GDP this year, up slightly from 3.3 percent in 2005.

Wyss says to stock-market investors: "Don't expect to get rich fast, as in the 1990s. But in general, things look pretty good."