Following a volatile but vertical course, international stocks have rocketed upward over the last decade, with a sustained rise since March 2003. Global demand for commodities produced in the emerging markets, and stable growth in Europe and elsewhere, have pushed international equity funds up 28.9% for the 12 months ended May 31, 2006, while the S&P 500 rose 8.6%.
A sell-off in international equities that began in mid-May, especially in emerging markets, may spell the temporary end of the boom. “Fears that rising inflation will lead to tighter global monetary policy in the U.S., Europe, and Japan, as well as key emerging markets, are leading investors to believe that global economic growth will slow, and earnings with it,” said Alec Young, S&P equity market strategist.
Although “significant,” this correction is neither surprising nor unhealthy, in that the market hasn’t seen a 10% drop for three years, Young added. Nor do its short-term, cyclical concerns undermine the outlook for long-term secular growth internationally. Thus, Standard & Poor’s continues to recommend placing 20% of one’s portfolio in foreign equities, including 3% in emerging market stocks–a stake small enough to contain potential losses.