Jan. 6, 2004 — Since sinking to lows last March at the outbreak of war in Iraq, equity markets around the world have surged on the back of the rebounding U.S. economy. Though global terrorism continues to cast a shadow over investor sentiment, low interest rates, mild inflation and improving fundamentals have generated strong, and in some cases, spectacular, returns for securities around the globe.
All international equity funds tracked by Fund Advisor posted solid gains in 2003. The average portfolio returned a handsome 40.7%. The best performers, in fact, were invested in either the emerging markets or small-cap issues. The number one fund for the year, the $23-million Eaton Vance Greater India/A (ETGIX), soared 117.3%, including a 43.4% surge in the fourth quarter alone. The portfolio is heavily invested in the booming industrials sector of the sub-continent.
The average global equity fund — those funds with the latitude to invest in both U.S. and foreign stocks — gained a robust 33.8% for the year. The top portfolio in this class, the $12.5-million McIntyre Global Equity Fund (DGLEX), had 86.5% of its assets in U.S. stocks as of Sept. 30, 2003.
“The rebound in the U.S. helped to spur demand for goods and services globally, with corporations spending more and the average individual consuming more,” said Wendy Trevisani, co-manager of Thornburg International Value/A (TGVAX). “Low interest rates have been stimulative in much of the developed world, including Europe, the U.K. and Japan. They have also come down significantly in many developing regions, such as India and Eastern Europe. Moreover, the weak dollar serves as an added incentive to invest abroad.”
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Emerging Markets Provide Biggest Lift
Among foreign equities, the story of the year has been the swelling emerging countries; indeed, markets such as Argentina, Brazil, Turkey and Thailand have soared nearly 100% this year. The strong performance has attracted more interest from investors. According to EmergingPortfolio.com Fund Research, 2003 will set a new record for cash flowing into emerging market equity funds. Investors poured $11.23 billion of new money into these funds through December 10, already surpassing the previous $10.89 billion record set in 1996. Of that total, more than half ($5.97 billion) has moved into Asian (ex-Japan) equity funds.
Trevisani notes that the emerging markets are providing more opportunities for both foreign corporations and investors. “Typically it costs less to operate in these regions, and many of these countries, like India, Korea and Taiwan, possess a high level of skilled labor,” she said. “There is also large internal growth occurring, with improvements in infrastructure. As long as many of these countries continue to grow GDP at a rate nearly double that of the developed world, strong returns should continue.”
However, Bernard R. Horn, president of Polaris Capital Management and manager of the Polaris:Global Value Fund/Investor (PGVFX), is less sanguine about the emerging world. “This asset class is as volatile and risky as ever,” he said. “The gains have already been made in the emerging markets. All that new money going into these funds is simply a matter of chasing yesterday’s performance. We don’t think these great returns are sustainable. Valuations are no longer so compelling, and, as the dollar weakens, their competitive advantages may greatly diminish.”
China, with its booming economy, has become the planet’s biggest manufacturing/outsourcing center — foreign companies, particularly in Japan, cannot resist China’s low labor costs and inexhaustible supply of skilled workers. “If China allowed its currency to be more flexible, that is, revalued upward, that would change the entire landscape of international investing,” Horn noted. “It would take away some of the competitive advantage of foreign companies moving jobs to China, which, in turn, would help sustain the overall growth in the rest of the world.”
Markets in Latin America skyrocketed in 2003, particularly Venezuela, Brazil and Argentina. Trevisani notes that stock prices in Latin America staged a “recovery from exceptionally depressed levels,” and that further recovery in 2004 is possible, and even likely, citing stable currencies and interest rates, high GDP growth, and a lack of geopolitical strife. Since their economies are closely tied to the U.S., our economic rebound is a “major” positive for them, she added.