Anyone familiar with the plethora of tax and regulatory policies that beset American business should not be surprised with the so-so performance of US securities. There are still good profits to be made in American stocks for the astute, selective trader. But as a general proposition, it is discouraging to think that the recent Dow Jones Industrial peak of 970 was well below the index's all-time high of 1051 set in 1973—despite the overall inflation of the intervening years.
Fortunately, you need not restrict yourself to the vagaries of the US securities markets. A growing number of savvy investors, while they are not prepared to abandon the US markets with all their diversity and liquidity, are realizing that there are other markets around the world from which to choose.
Over the past decade, the US securities market has been among the world's worst in terms of both capital appreciation and dividends. Today's historically low price/earnings ratios are evidence of this dismal record. Of course, relatively low stock prices can be seen as great buy opportunities, but only if you are optimistic about the course of government policy and of the American economy.
Realistically, it makes sense to look for more action abroad. One of the most dramatic cases in point at the moment is the Japanese stock market. The Nikkei (the Japanese version of the Dow) stood at 6000 as recently as 1978, but was rapidly moving toward 7000 as this was written. And some observers foresee the index hitting 10,000 within a year.
The reason is that, despite its enormous dependence on foreign oil and resistance to its exports, Japan has experienced a resurgence in its trade performance, while keeping inflation under control. As a result, there has been a strong inflow of petrodollars into high-yielding Japanese investments. Simultaneously, holders of Japanese securities have experienced a new surge in the value of the yen in which they are denominated.
Hong Kong has been the scene of another hot market. Stocks there have risen nearly 650 percent over the past decade, versus less than 17 percent for US stocks. Other exciting performers this year include France—the Indicateur de Tendance index of the Paris Bourse has gone from 96 to 119 since January—Mexico, and Australia.
It is hard to generalize about why foreign markets have been outperforming those of the United States. The important thing to recognize is that foreign markets follow US markets less and less closely. So when US stocks are in a slump, chances are you'll be able to find a healthy market elsewhere.
Aside from the countercyclical element, there are other good reasons to consider foreign securities. For instance, while it is validly argued that many foreign markets are less liquid (that is, harder to buy and sell in), this also carries advantages for those who are prepared to exploit them. For one thing, the stock of a foreign company will often sell at a lower price than the stock of a comparable American company—because of lower demand. For another, as Brian Toohey of the Australian Financial Review notes, the thinness of foreign markets often means that "it doesn't take much foreign interest to make it really take off."
Still another reason to consider foreign securities is the need for diversifying a portfolio. In some industries, of course, there simply are no respectable American stocks to choose from—for instance, in diamonds. But even where American companies are well-represented, it seems imprudent to ignore foreign alternatives.
"A security analyst or portfolio manager…is not doing his homework if he ignores Siemens, Hitachi or Philips in the electrical industrial; Sony and Pioneer in consumer electronics; L'Oreal in cosmetics; Petrofina in petroleum; Michelin in tires and rubber; Carrefour in retailing; Carlsberg-Tuborg and Heineken among breweries; Swissair among airlines; and Unilever, Ciba-Geigy, and a host of others among multinationals," writes Rainer Esslen in his Complete Book of International Investing.
Then too, investing in foreign securities can be a good way to diversify into other currencies. Most people who buy foreign securities don't get involved in currency transactions directly. After all, most major foreign companies' shares are listed in the United States as American Depository Receipts (ADRs). Or you can buy shares in a foreign stock mutual fund traded here—for example, Scudder, or Templeton World, or Japan Funds. All these are traded in dollars.
If you decide to trade on the foreign market, using the international department of an American broker, chances are you'll be making the transaction in dollars here, with the actual currency conversion being made at the point of sale abroad. Even so, if you buy a Swiss stock and the Swiss franc rises against the dollar, when you sell the stock, the francs in which it is quoted abroad will exchange for more dollars.
Another approach is to trade directly through a foreign bank, drawing on foreign currency deposits to invest on overseas exchanges. Communications, however, become a problem for the active trader; a discretionary portfolio management program or, alternatively, shares in a foreign-based mutual fund or unit trust might make more sense.
The watchwords, in any event, are global flexibility for the '80s.
Steve Beckner is a free-lance financial writer, the editor of Deaknews, and the author of The Hard Money Book.