April 3, 2003 — Uncertainty and anxiety over the war in Iraq have cast a black cloud over global markets while any recovery in the all-important U.S. economy has seemingly been postponed.
Mutual funds that invest overseas have incurred widespread losses. The average international equity portfolio sank 7.6% in the first quarter of 2003. Despite a handful of exceptions, stock markets around the world are in the red.
“The war is clearly a psychological negative on investor sentiment,” said William Fries, lead portfolio manager of Thornburg International Value Fund (TGVAX). “But we were in a slow-growth climate long before the war.”
Global equity funds, which also have the latitude to invest in U.S. stocks, dropped 5.7% in the first quarter. Here in the U.S., the NASDAQ edged up 0.42%, while the S&P 500 slipped 3.3%. In short, diversifying in foreign markets did little to help investors this quarter.
Korean Tiger Declawed
One of the strongest economies over the past few years, South Korea has now turned sour, due largely to the escalating nuclear standoff with its Communist neighbor, North Korea. The engine of the South Korean economy, the high tech sector, has been battered by weaker forecasts for exports to Europe and North America, sending equity prices plunging.
The two very worst performing international equity funds, the Matthews Korea Fund (MAKOX) and Fidelity Advisor Korea/C (FAKCX), invest exclusively in South Korea. Though most observers believe the South Korean market has already discounted the political crisis, the real problem facing the country is a softening export economy and corporate governance.
“Fundamentals are weakening in South Korea, and the markets are starting to recognize that,” said Michael Reynal, co-manager of Principal International Emerging Markets/A (PRIAX). “Korea is also facing some corporate governance issues. For example, South Korea’s SK Global just had to restate their earnings. This came as a big negative surprise. Now, we are seeing similar negative surprises from other companies, especially the banking sector.”
China Remains Resilient
One sweet spot in an otherwise sour global economy is China. The sleeping giant is enjoying surging exports, increased industrial production, powerful domestic demand for imports, and a rapidly developing telecommunications industry. Two of the top five funds in the first quarter tracked by Standard & Poor’s invest primarily in stocks of Chinese companies.
“We are seeing an investment-driven economic boom in China, which includes a very strong export component,” Reynal said. “Exports from China will likely slow down this year, but that is due to a secular shift as they have gained market share from other Asian and non-Asian exporters,” he added. “One of the great things we have seen in Asia in the last five years is a larger local component to economic growth — the Asian consumer has become strong and more confident, thus allowing us to invest in their local economies.”
Still, one must exercise caution when considering investing in China. “Although their internal boom should continue,” Reynal said, “there is some fear that China could suffer a financial crisis in the next year or two because of debt at the government level — both provincial and central — over-investment, rising deficits, and global trade issues.”