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If your portfolio is stuck with losers, you might want to add more international stocks.
March 23, 2005: 12:28 PM EST
By Paul R. La Monica, CNN/Money senior writer
Global warming: Foreign stocks that list in the U.S. have outperformed the Dow during the past year.
Global warming: Foreign stocks that list in the U.S. have outperformed the Dow during the past year.

NEW YORK (CNN/Money) This market is ugly. Fears of rising interest rates, record high oil prices, inflation and slowing profit growth have put a major dent into stocks this year.

But that's only if you've been focusing on American companies. For investors with a more worldly view, the environment hasn't been so bad. In fact, it's been quite healthy.

Sure, the Dow and S&P are off about 3 percent this year and the Nasdaq has fallen nearly 9 percent. But international equities, after a solid 2004, have continued to hold up well this year.

According to Morningstar, foreign small and mid-cap growth funds are up nearly 5 percent this year while Asia funds (excluding Japan) are up about 3 percent. And Latin American, emerging markets and European stock funds are all up about 2 percent.

And with interest rates, which remain at relatively low levels worldwide, helping to spark robust levels of economic growth across the globe, many professional investors expect the trend to continue.

"Money will flow to where there are solid returns on capital," said Frank Holmes, chief executive officer of U.S. Global Investors, a San Antonio-based money management firm. "There are great opportunities in Eastern Europe and other emerging markets. We're seeing economic growth twice that of the U.S. but stocks are trading at a discount."

To that end, there appears to be particular value for investors in larger international stocks.

According to data from Thomson/Baseline, foreign stocks with a market value of at least $10 billion that list in the U.S. as American Depositary Receipts (ADRs) are trading at about 15 times earnings estimates for 2005. And profits are expected to increase 23 percent this year and 11 percent a year for the next five years.

By way of comparison, the S&P 500 trades at 17 times 2005 estimates even though earnings are only expected to rise 4 percent rate this year and 6 percent annually for the next few years.

Take a European vacation

As such, James Averill, manager of the Hartford Value Opportunities fund, said at a presentation earlier this month that about 20 percent of his fund is now invested in international stocks.

He said that a weaker U.S. dollar and a growing trade deficit should continue to bode well for companies based abroad. A couple of his favorites in the fund are French tire maker Michelin, which trades on the Paris Stock Exchange, and Royal Bank of Scotland, which trades in London.

Other international stock followers like the prospects for European banks as well.

Ajay Kapur, global equity strategist with Citigroup Smith Barney, wrote in a recent report that he sees greater value for European-based financials like UBS (Research), ING (Research) and Deutsche Bank (Research) than their U.S. counterparts since many of the American bank stocks have moved up sharply in recent months.

Kapur also thinks European telecom stocks are bargains and argues that some of the big telecom mergers in the U.S. in recent months could help lift the shares of other telecoms.

"We now find the valuations attractive, are emboldened by M&A activity, and most importantly feel the sector is now under-invested, especially in Europe," Kapur wrote.

Julian Mayo, investment director of Charlemagne Capital, an investment firm based in London that subadvises the U.S. Global Investors Eastern European fund, agrees that telecom is a good place to be.

Mayo said that two of his fund's top holdings are Russian wireless companies Vimpel Communications (Research) and Mobile Telesystems (Research), which he expects to continue to grow rapidly. Mobile Telesystems, for example, reported a nearly 40 percent increase in sales and net income for the fourth quarter on Tuesday.

Still, while the overall outlook for many global stocks looks bright this year, the one sector that investors may need to be wary of in the short-term is natural resources. Rising oil prices have led to a surge in international energy stocks just as it has done for American-based oil firms.

"The sector has had a good run and valuations are less helpful now," wrote Kapur.

Holmes agreed that a pullback is possible. He thinks warmer weather in the coming months could lead to a drop in oil prices and energy stocks. But he adds that increasing demand for oil from rapidly growing countries like India and China in the next few years make energy stocks a solid bet for investors with a longer-term horizon.

For a look at ADRs, click here.

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