Watch Your Step Overseas

2/3/2014


With U.S. stocks struggling to make headway this year after a wildly successful 2013, you may be tempted to look overseas. However, while many foreign economies are likely to grow faster than the U.S., you should proceed with caution.

Emerging markets have taken a beating so far this year, not the start investors had envisioned after a weak 2013. Reasons for the weakness vary from market to market — political turmoil, inflation, high debt levels, and tepid economies each deserve some of the blame.

China, the motor powering the global economy in recent years, said growth of gross domestic product (GDP) slipped to 7.7% in 2013. China's growth could keep decelerating this year as the country explores ways to encourage domestic consumption while clamping down on lending and coping with a potential bubble in its real-estate market.

GLOBAL GDP SNAPSHOT
All of the countries below are among the world's 25 largest economies. For some perspective, the U.S. is expected to grow gross domestic product (GDP) 2.8% this year, the eurozone 0.9%. Europe is recovering but far from robust. While China's growth is slowing, it remains well above that of most developed countries, and emerging markets in Asia are likely to set the pace in 2014.
---------------------- GDP Growth ----------------------
2012
2013 (Est.)
2014 (Est.)
2015 (Est)
GDP 2014: Fast growers
China
7.8
7.7
7.5
7.4
India
4.0
4.6
5.4
6.1
Taiwan
1.3
2.0
3.9
3.8
South Korea
2.0
2.8
3.6
3.7
Mexico
3.9
1.4
3.5
4.0
GDP 2014: Slow growers
Netherlands
(0.9)
(0.1)
0.3
1.3
France
0.0
0.1
0.7
1.3
Germany
0.9
0.6
1.6
1.8
Japan
2.0
1.8
1.7
1.4
Canada
1.8
1.7
2.2
2.6
Source: Blue Chip Economic Indicators.

However, exports for China and other emerging markets could pick up as Europe pulls itself out of the financial crisis. And slow is a relative term; Blue Chip Economic Indicators projects 7.5% growth for China in 2014.

The eurozone's recession ended in the second half of 2013, and the region enjoyed somewhat stronger manufacturing and retail sales toward the end of the year. Ireland exited its bailout program last year, and Portgual seems confident it will follow suit by the middle of 2014. Yet Europe's economy remains fragile, and deflation threatens. Unemployment in the European Union stands at 12%, with young adults and the southern countries hit hardest. GDP growth in many European countries will likely be tepid in 2014 and 2015.

COUNTRY RETURNS
The 12 countries below represent a broad sample of major global economies.
Total Returns, MSCI
-------- Global Equity Indexes --------
----- Annualized -----
Country
2013
(%)
5
Years
(%)
10
Years
(%)
Argentina
64
9
8
Brazil
(19)
6
11
China
4
12
12
France
26
10
6
Germany
31
14
9
India
(4)
13
11
Italy
20
2
1
Japan
27
8
4
Mexico
(2)
16
14
South Korea
3
18
10
Taiwan
7
14
3
U.S.
31
16
6
World
27
15
7
Note: Returns in U.S. dollars.     Source: MSCI.

Of course, robust economic growth doesn't always coincide with big stock returns. Last year, China's 7.7% surge in GDP translated into a rather meek 4% total return for the MSCI China Index. India's growth pace should keep accelerating, yet inflation has pressured stock returns. In contrast, Europe delivered some of the biggest stock returns as investors waded back in.

We monitor just a handful of foreign companies, partly because of the quality of corporate financial reporting. Many foreign companies disclose far less data than their American counterparts, preventing their inclusion in our quantitative stock-rating system, Quadrix. Stocks listed in the table below earn outstanding Overall scores, and the data points used in Quadrix are largely present.

Investors seeking broad international exposure should consider these three recommended mutual funds: Artisan International ($29; ARTIX) and Vanguard Total International Stock Index ($16; VGTSX) focus on large foreign companies, while Wasatch International Growth ($28; WAIGX) concentrates on midcap and small-cap stocks.

TOP INTERNATIONAL STOCKS IN QUADRIX
The following foreign stocks score above 90 for Quadrix Overall and have market values above $5 billion. We are also fairly confident in their Quadrix scores. All have an OK to Rank above 85%, reflecting the percentage of statistics used in the Overall score for which we have data. Some stocks, such as Accenture ($81; ACN) and Ace ($95; ACE), have huge operations in the U.S. but are incorporated overseas. Among the stocks below, we recommend only Magna International ($86; MGA) for purchase. Accenture is rated A (above average).
12-Month
-- Growth --
Company (Price; Ticker)
Stock-
Market
Value
($Bil.)
EPS
(%)
Sales
(%)
Trailing
P/E Ratio
12-Mo.
Total
Return
(%)
Quadrix
Overall
Scores
Quadrix
OK To
Rank
(%)
Location
Industry
Accenture ($81; ACN)
51.79
9
2
19
15
91
88
Ireland
Tech Consulting & Svcs.
Ace ($95; ACE)
32.18
36
7
10
14
97
88
Switzerland
Property & Casualty Ins.
Amdocs ($43; DOX)
6.80
12
3
15
19
95
97
U.K
Tech Consulting & Svcs.
Magna International
($86; MGA)
19.28
12
12
13
65
97
100
Canada
Auto Parts & Equipment
Mobile Telesystems
($18; MBT)
18.40
30
0
11
8
97
97
Russia
Wireless Telecom Svcs.
NetEase ($76; NTES)
9.90
23
16
15
61
98
86
China
Internet Software
Open Text ($98; OTEX)
5.94
30
8
17
66
94
96
Canada
Application Software
Shire ($151; SHPG)
29.59
4
6
22
53
92
100
Ireland
Pharmaceuticals
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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