As you well know, the U.S. stock market isn't the only one that has caused investors some serious grief lately. While the S&P 500 has lost more than 35% in the past year, many international markets have done even worse. Just looking at one of my own holdings, the Fidelity Emerging Markets (FEMKX) fund is down more than 52% since this time last year. Ouch!
These aren't small companies that are getting whacked either. According to Morningstar, the average market cap of the 180 stock holdings is about $11 billion. Big, well-known companies like China Mobile (NYSE:CHL), Brazil's Vale (NYSE:VALE), and Mexico's America Movil (NYSE:AMX) top its list of holdings.
What I realized lately, though, is that many foreign markets have rebounded even more strongly than the U.S. has -- and I'm not talking about obscure places like Elbonia or Freedonia. According to The Economist, when looking at year-to-date returns, the U.S. -- down 2% for the year as of May 13 -- is doing much worse than China (up 46%), Brazil (up 44%), India (up 22%), and Russia (up 50%).
Lessons to learn
Thinking about these statistics, several lessons come to mind:
- For starters, they're useful as a reminder that foreign markets don't necessarily follow U.S. stocks over short periods of time. We individual investors tend to assume that what's going on here is the same everywhere, but the fact is that some areas of the world do better than others even during tough times.
- This also serves as a good reminder to look for bargains among former high-flying sectors. Unfortunately, most investors only look at foreign stocks when they've had blockbuster years -- which often turns out to be exactly the wrong time to buy. Just remember, though -- the top performers of today aren't necessarily the best stocks for tomorrow, and tomorrow's returns are what count for you.
- Finally, we should remember that emerging markets can be especially volatile, rising -- and falling -- at a faster rate than more established markets.
But then ...
Of course, it's not so simple. Despite the economic slowdown, the truth is that these emerging markets are going to continue to emerge over the long run. The big bounces in these markets could still just be the beginning of a new bull market -- and if the problems in the global economy don't prove insurmountable, it might actually be a great buying opportunity.
Just be careful. When it comes to foreign companies and economies, you have to have a good handle not only on the company, but also on the country. Some countries, especially emerging ones, have experienced relatively high inflation rates in recent years. And while projected inflation is falling throughout the world, you still have to realize that different countries will respond to economic conditions differently.
Foreign companies also operate under varying accounting and disclosure rules, and in very different political and societal environments.
What to do
One possible solution for investors seeking international exposure is to invest in many good old American companies that derive much of their revenue abroad. PepsiCo (NYSE:PEP) and Yum! Brands (NYSE:YUM), for example, have huge international operations that represent some of their biggest growth opportunities.
In general, foreign revenue growth rates are rising faster than domestic ones, delivering a nice boost to these companies. Taking out currency effects, Wal-Mart's (NYSE:WMT) international sales and income rose at a higher rate than the company's domestic numbers did. And while new natural gas plays in the U.S. have piqued interest in domestic energy production, big oil companies like ExxonMobil (NYSE:XOM) have to maintain a worldwide presence to compete.
But if you're game for a challenge, investing directly in foreign companies can bring extremely high rewards. There are risks involved, but the opportunities are truly amazing.
For more on global investing:
- Here's how you can make some real money.
- Think the dollar's doomed? Read this.
- Why India is no China.
