Is the Global Boom Done?

Smart investors have booked big profits by investing overseas over the past several years. Yet there's increasing evidence that the global boom may be coming to an end -- at least for now.

Foreign markets have left the U.S. in the dust in recent years. Developed countries such as Germany have seen strong performance since 2003, while emerging markets such as those in India and Brazil have brought home huge profits, with returns around 30% annually in the past five years.

Yet this year, that string of strong results has started to waver. Just take a look at how much less impressive some popular international stock indexes have been:

Country

Index

YTD Return

United States

S&P 500

(12.2%)

Germany

Dax

(14.2%)

Great Britain

FTSE 100

(16.7%)

Japan

Nikkei 225

(11.4%)

China

Shanghai Composite

(44.9%)

India

Bombay Sensex

(30.4%)

Brazil

Bovespa

1.4%

Source: The Economist. YTD returns are through Aug. 6.

Even Brazil, with its small positive return, hasn't been completely immune from the downturn. While the S&P has risen by more than 5% in the past month, Brazil's markets lost nearly 10%.

So if you have money to invest right now, is it too late to catch part of the impressive global-stock boom that you missed out on? Or is the latest downturn a buying opportunity that you can't afford to pass up?

Commodities and emerging markets
Much of the blame for the lagging international markets falls on the recent pullbacks in hot sectors such as oil, precious metals, and other commodities. In recent weeks, oil has dropped from its highs near $150 per barrel to around $115. Similarly, gold, which traded above $1,000 per ounce briefly, now fetches less than $830.

Those drops have a direct impact on shares of global stocks -- especially those in emerging markets, many of which have benefited greatly from the natural-resources boom. With the help of our Motley Fool CAPS screening tool, let's look at just a few international companies that have seen tough times in the past month or so:

Company

CAPS Rating (Out of 5)

4-Week Return

Petroleo Brasileiro (NYSE: PBR  )

*****

(14.8%)

PotashCorp (NYSE: POT  )

***

(23.1%)

Rio Tinto (NYSE: RTP  )

****

(13.4%)

Vale (NYSE: RIO  )

*****

(15.0%)

BHP Billiton (NYSE: BHP  )

*****

(11.0%)

Source: Motley Fool CAPS.

Meanwhile, a trend that has strongly supported international stock prices has shown signs of reversing: The U.S. dollar has strengthened considerably in recent weeks, as the euro dropped from as high as $1.60 to below $1.50 in yesterday's trading. Just as the falling dollar in recent years made earnings of foreign companies more valuable in dollar terms, a stronger dollar means that even if a stock rises in foreign-currency terms, its value for U.S. investors may actually drop.

Learning the hard way
If you've had experience with market booms and busts in the past, you know that hard-fought gains that take years to earn often disappear in a very short time. That's a lesson Chinese investors are learning firsthand: China's market has lost all of its 2007 gains in its recent swoon.

And if you think any market drop is automatically a good buying opportunity, ask Japanese investors how they feel -- 18 years after hitting all-time highs, the Nikkei still languishes at barely a third of its former levels. Or you could ask investors in companies such as Yahoo! (Nasdaq: YHOO  ) and F5 Networks (Nasdaq: FFIV  ) , which both trade at just a fraction of their highs during the tech bubble in 2000.

Why overseas markets will be long-term winners
There's no doubt that international markets are facing difficult challenges. After years of strong economic activity, emerging-market countries must successfully deal with inflationary pressures and the threat of overheating economies. Similarly, developed countries must adopt policies that reconcile their own local interests with the negative effects that a U.S. economic slowdown would have on the global economy. That's a balancing act in which even the most experienced finance experts could easily fail.

The main question for international investors is whether foreign countries have the experience and discipline to address and overcome these challenges. Although using the experiences of developed countries may help younger economies avoid mistakes, the increasingly interdependent global economy will force the world's top economic powers to cooperate to solve problems. Whether they will is anyone's guess.

Yet just as the U.S. has always managed to pull itself through tough times, international markets should recover in time. Although recent declines serve as a useful reminder that stock investing always involves risk, the huge potential of global stocks makes them very attractive at current levels. Stocks could easily fall further, but in the long run, investors who have the nerve to buy into weakness will probably earn strong returns well into the future.

For more on investing overseas, read about:

Want to learn more about international investing? Our Motley Fool Global Gains newsletter service scours the globe to find you the best investing opportunities, wherever they may be. Take a free look for 30 days and see how Global Gains can add some spice to your portfolio.

Fool contributor Dan Caplinger thinks the global boom is just getting started. He doesn't own shares of the companies mentioned in this article. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy is good around the world.


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