Although a dramatic outperformance in many foreign equity markets last year has led to an enormous flow of cash into global stock funds, Standard & Poor’s believes such gains may substantially moderate in 2006.
Alexander Young, Standard & Poor’s equity market strategist, said that while stock markets in Japan, Latin America, and the Asia-Pacific regions will likely remain strong this year, they may fall below last year’s gains. For example, Standard & Poor’s expects the S&P Euro 350 index to slip 2% this year and the the S&P Topix 150 index, which comprises a broad array of highly liquid securities from each major sector of the Japanese market, to gain 5%.
Meanwhile, Standard & Poor’s sees the possibility for U.S. large-cap stocks offering the best value in 2006, based on “respectable” earnings per share growth of 11% and U.S. GDP growth of 3.3%. The S&P 500 index is expected to show a 9% rise for the year.
Young also cautions that money flows are often a lagging indicator. “It usually happens when the money’s already been made” in a given market, he said, and investors are “chasing performance.” Based on this outlook, investors who want to hedge their bets by investing simultaneously in the U.S. and foreign markets while holding onto the relative security of the largest-cap companies might want to consider global mega-cap exchange-traded funds (ETFs).
The streetTRACKS Dow Jones Global Titans ETF (DGT) is based on a 50-stock index provided by Dow Jones. Managed by State Street Global Advisors, between 60%-65% of the index by market cap weight is parked in U.S. issues, 15% is in U.K. stocks, and the remainder is in European, Japanese, and South Korean holdings.
The $405-million iShares S&P Global 100 Index Fund (IOO) comprises 100 stocks designed to measure the performance of large transnational companies that are of major importance in global markets and which have a minimum market cap of $5 billion. Issued by Barclays Global Advisors, the fund’s holdings are concentrated in the U.S., U.K., Europe and Japan, although its American holdings represent 50% of the index by market cap.