seems so obvious.
investing means looking for bargains and buying the type
of stocks and stock funds that are cheaper than others.
On that basis, you might assume that buying a foreign
fund now would be just the bargain you should seek.
hold on. Foreign funds are not at bargain-basement
true that the global economy has been struggling. Europe
has been on the edge of recession for months, with
unemployment in places such as Spain at about 24
that doesnít mean foreign funds are a screaming deal.
Stocks have been climbing in price even though many
economies outside the U.S. remain troubled. And for
Americans, who use dollars to invest in foreign funds,
the deals have evaporated even faster than for foreign
investors. Foreign stocks, on average, are even pricier
in dollars than they were just before the financial
crisis that began showing up in 2007.
analyst Kevin McDevitt notes that the Morgan Stanley
Capital International All Country World Index, excluding
the United States, makes the point. That index
represents the value of foreign stocks outside the U.S.
And the price on it recently was 16.4 times the profits
the companies within the index have earned during the
past 12 months. The price is actually higher than May
2007, when the price of the index was 15.7 times its
means Americans are spending more to invest in the world
now than they were when the globe was on a sugar-high of
borrowed money just before the financial crisis.
people pick foreign funds now, they will get a price
somewhat better than if they invested exclusively in the
U.S. The price of the large U.S. stocks that make up the
Standard & Poorís 500 Index is about 19.5 times
the profits those companies earned the past 12 months.
donít think anyone sees a corner of the world thatís
very cheap. This is a very difficult environment in
which to invest," McDevitt said.
investors search for deals because a cheap stock or area
of the globe can climb a lot when conditions in the
economy or profits improve. Yet, a pricey stock or stock
fund may not climb much after purchased, because people
paid a pretty penny for it in the first place based on
great expectations. And if a sudden shock in the economy
or in profits hits, investors who paid a lot for
investments, can get scared quickly and dump it as they
run for safety. The result: The stock or stock fund can
investors might think European or Japanese stock funds
must be a bargain now after lengthy troubles in those
economies, investors have been rushing to buy them for
months. So deals have already eroded.
stock market is near a 15-year high, and Germany and
France have been near all-time highs.
are being driven up in price by actions taken to
stimulate troubled economies in Japan and Europe.
Central banks there have been buying bonds to push
interest rates on savings accounts and safe bonds to
very low levels. Consequently, investors have a lot of
money to invest, but donít want to earn near zero
interest rates in safe bonds. So theyíve decided to
take greater risks in stocks. And as theyíve bought
more stocks, thatís pushed prices higher; ending
Americans, bargains have been sharply reduced, McDevitt
said. When an American invests money in a foreign fund,
401(k), IRA or other account, they use their dollars.
And that makes a big difference for the outcome and also
the value of the investments to Americans.
the MSCI Europe Index, which shows how much people would
make on average in the European stock market. If you
simply focused on how the European stocks performed in
euros during the past 12 months, an investor would have
made 18.5 percent in the European companies, a
delightful return. But Americans wouldnít get that
because they donít invest euros. Rather, U.S. dollars
would be much stronger than euros. And as a result,
European stocks for Americans have ended up as losers.
the past 12 months, instead of making 18.5 percent in
the MSCI Europe Index, an American would have lost 0.8
percent in dollars, notes McDevitt. Foreign markets have
become less valuable to Americans as the dollar index
has climbed about 22 percent.
doesnít necessarily make foreign funds a bad
investment. For the sake of diversification, keeping
foreign and U.S. stocks makes sense. But if the goal is
bargain-hunting, foreign funds donít make the grade.