Europe’s battered stock markets could fall more, and the emerging markets’ hot streak may be history, at least for a while.
Get out?
No, says Benjamin C. Sullivan, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y.
“While you can’t predict how foreign stocks will do in the short run, there’s long-term value there,” he says. “You need the right amount in your portfolio.
Europe is a value and dividend play, while emerging markets are a growth play, Sullivan says. And both help protect against a decline in the greenback.
Palisades Hudson invests 35% of its clients’ equity portfolios abroad, he says. That includes about 14% in Europe, 11% in emerging markets and 10% in other developed markets, including Japan, Australia, Singapore and Canada.
Latin American markets turned in a tidy 16% annual return for U.S. investors over the last 10 years, while Asian emerging markets returned 9% annually, compared to 2% for the EAFE index that tracks developed international markets and 3% for the U.S.
Despite that outperformance, emerging nations make up just 13% of global stock-market capitalization while producing 49% of global gross domestic product, Sullivan points out.
“There’s more room to grow in emerging markets,” he says. “In the next few years, more than 70% of world economic growth is predicted to come from those regions. By adopting best practices from the developed world — such as advanced technology, better infrastructure, and open markets — these countries will grow their middle class, and investors should benefit as a result.”
Active funds vs. index funds
Depending on what market you’re in, there are different investing strategies to rely upon. Use actively managed mutual funds for emerging markets, Sullivan says. Those markets are inefficient enough for a skilled fund manager to earn its fee by outperforming the index.
He likes the T. Rowe Price Latin America Fund, which has outperformed the Lipper Latin American funds average over the last 10 years. He also invests his clients’ money in the T. Rowe Price New Asia Fund and Matthews Pacific Tiger Fund.
Sullivan avoids Russia and other Eastern European markets, deeming them too risky due to the region’s historic disregard for property rights.
Western Europe, in contrast, offers high dividends and deep value. The Vanguard European Stock Index fund Sullivan uses is heavily weighted in big multinationals like BP, Anheuser-Busch, Novartis, HSBC and Royal Dutch Shell that sell their products worldwide. With share prices down, major markets like Germany, France and the United Kingdom sport 4% dividend yields compared to about 2% for the U.S.
Sullivan separately allocates 7.5% of equities to real estate investment trusts, including 5% to U.S. funds and 2.5% to an actively managed Morgan Stanley international fund that buys real estate investments in developed and emerging countries. Investing in global property markets boosts diversification, he says.
The rest of the world is too big and dynamic for American investors to ignore.
“Limiting your investments to the U.S. would be as arbitrary as choosing to invest in U.S. companies headquartered only in New York State,” Sullivan says.
But don’t invest in U.S. or foreign stock funds if you’ll need that money within five years, he adds. Equities should be a long-term investment.
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