Overseas — Where The Wild Swings Are

11/7/2011


The MSCI World Index has bounced 9.4% from its October low, but it and many other overseas indexes still lag U.S. stocks. So far this year, the World Index is down 6.5%, compared to a 1.5% decline for the S&P 500 Index.


GLOBAL GROWTH, INFLATION, AND PERFORMANCE

Estimated
2010
2011
2012
2013
Econ.
Growth
(%)
Inflation
(%)
Econ.
Growth
(%)
Inflation
(%)
Econ.
Growth
(%)
Inflation
(%)
Econ.
Growth
(%)
Inflation
(%)
Central, Eastern
Europe
4.5
5.3
4.3
5.2
2.7
4.5
3.5
3.7
Developing Asia
9.5
5.7
8.2
7.0
8.0
5.1
8.4
4.4
European Union
1.8
2.0
1.7
3.0
1.4
1.8
1.9
1.8
Industrialized
Asia
8.4
2.3
4.7
3.7
4.5
3.1
4.4
2.7
Latin Amer./
Caribbean
6.1
6.0
4.5
6.7
4.0
6.0
4.1
5.4
Middle East/
N. Africa
4.4
6.8
4.0
9.9
3.6
7.6
4.3
6.5
Sub-Saharan
Africa
5.4
7.5
5.2
8.4
5.8
8.3
5.5
6.4
U.S.
3.0
1.6
1.5
3.0
1.8
1.2
2.5
0.9
World
5.1
3.7
4.0
5.0
4.0
3.7
4.5
3.2

Weighed down by ongoing debate over financially supporting weaker members of the European Union, the MSCI European Union Index has declined 11% so far in 2011. Some clarity appeared to arrive in late October when the EU decided to write down the value of Greece's government debt and pledged to backstop the bonds of other troubled eurozone countries. Shares rallied on the news, but the Greek prime minister's call for a referendum on the deal has investors worried that Greece will walk away from its debts.

Despite strong economic growth, emerging markets in Asia, Latin America, and Africa have suffered some of 2011's biggest stock declines. Investors worry about both slowing growth and stubbornly high inflation. Academic research suggests that inflation negatively affects stock returns, and emerging-market inflation is likely to remain well above levels in Western countries for at least the next two years.

Yet even as investors flee emerging markets in search of safer options, U.S. companies tap these regions to offset sluggish growth in the U.S. and Western Europe. Seven of our recommended stocks derive more than 65% of their annual revenue abroad, including Agilent Technologies ($35; A), Intel ($24; INTC), and Newmont Mining ($66; NEM). Intel derives about half of its sales from Asia, while South America, Asia, and Australia each contribute roughly a quarter of Newmont's revenue. To review the foreign-market exposures of all Forecasts recommended stocks, visit www.DowTheory/Go/Foreign.

Investors seeking emerging-market exposure should eschew individual stocks or sector funds that focus on a specific country. Instead, try an index fund, such as Vanguard Emerging Market Stock Index ($26; VEIEX).


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