April 4, 2005 — Apparently, there was nowhere to hide.
International equity markets provided little relief for investors seeking escape from negative returns in the U.S. Aside from a few isolated bright spots, like South Korea, Eastern Europe and Argentina, international stocks delivered negative to tepid returns in the first quarter of 2005.
However, Jeff Knight, Managing Director and Chief Investment Officer at Putnam Global Asset Allocation, notes that “almost all foreign markets actually gained ground in the first quarter even as the U.S. market fell. If we look at local market returns, i.e. before converting to dollars, only a few foreign markets fell in the first quarter.”
The average international stock mutual fund edged up just 0.26% for the quarter, while the average global equity portfolio, which can also invest in U.S. stocks, slipped 1.25% on average. But that’s still better than U.S. stock performance: The S&P 500-Stock Index declined 2.3% for the three-month period, while the NASDAQ composite plunged 8.1%.
Relative to the U.S., foreign stock markets are benefiting from higher profit growth, low local interest rates, a continued weak dollar, the growing U.S. trade deficit, and the perception that, despite a few years of outperformance, overseas markets remain undervalued and, particularly in the emerging countries, sport faster-growing economies.
“We are now in the midst of a global economic rebalancing process,” said Knight. “Between 1995 and 2002, 95% of the world’s GDP growth came from the U.S., and only 5% from the rest of the world. That was an unsustainable situation. Now, the growth rate outside the U.S. is picking up significantly.”
Knight indicated that outperformance in foreign markets is now being driven more by improving fundamentals, rather than the effects of currency. “For the last three calendar years, the MSCI EAFE Index beat the S&P 500 every year,” he noted. “However, 2004 represented the first year that foreign market returns were supported by strong fundamentals, instead of the currency translation effects of the weak U.S. dollar. Overall, in overseas markets, fundamentals continue to improve and valuation remains attractive; at this point, currency is a tail-end benefit.”
In addition, U.S. investors are becoming more enamored of putting their money overseas. For example, the Investment Company Institute reported that of the $22.43 billion of inflows recorded by stock funds in February, foreign equity funds received more than half of that amount, about $11.95 billion.