(MONEY Magazine) – The U.S. stock market is looking increasingly shaky now that interest rates are rising and threatening to slow the flow of cash from money funds and CDs into stocks. By contrast, share prices in many foreign countries are soaring 20% to 40% from last year's lows. Moreover, despite those advances, foreign markets still have some big gains ahead of them as a worldwide economic recovery takes hold. Although the U.S. recession ended in early 1991, Europe, in particular, is still looking forward to a rebound from its two-year slump. To help you add a foreign accent to a diversified portfolio, here are eight stocks that analysts rate among today's top choices. And while all foreign investments can be hurt temporarily if the dollar increases in value against local currencies, American investors nonetheless stand to enjoy large gains in these eight stocks over the next 18 months to three years. The stocks trade as American Depositary Receipts (see the box below) on the New York Stock Exchange, except for the three Hong Kong utilities that trade in the U.S. as over-the-counter ADRs. We begin with the least risky choices:

-- Chemicals in Europe. Most economists expect that a sustainable recovery will finally take hold in Europe late this year or early in 1995. And chemical companies would be prime beneficiaries. "Because the industry is closing a lot of unprofitable plants, the end of the recession will result in higher chemical prices over the next year," says Andrew W. Cash at Paine Webber in New York City. Among the major chemical stocks, analysts single out Britain's Imperial Chemical Industries (ticker symbol: ici; recently traded at $45.50), with estimated 1994 sales of $13 billion. "ICI can possibly triple its pretax income between 1993 and 1995," says analyst James H. Wilbur at Smith Barney Shearson in New York City, who rates ICI as his top pick for 1994. Cash at Paine Webber notes that the company has slashed its costs: "Over the past three years, ICI has reduced its head count by 25,000, or 27%." He thinks the stock, which yields 3.9% after Britain's withholding taxes, could reach $60 a share within 18 months, for a 32% gain from today's levels, or a 38% total return. -- Natural resources Down Under. A worldwide economic recovery would also benefit companies that produce natural resources. Those firms based in Australia and New Zealand seem poised to exploit the strong anticipated pickup in nearby Asian markets. Analysts particularly favor Fletcher Challenge (flc; $19.50), New Zealand's largest company. In addition to oil and gas, the $9.2 billion firm has forestry interests in countries such as Canada and Chile. "As the forests mature over the next 15 years, revenues from wood and pulp could quadruple," says analyst Warwick Jones at Merrill Lynch in New York City. Over the next 18 months, Jones sees prices for pulp and newsprint rising at least 30% as the global economy improves. Currently, the shares look cheap, trading at only about 15 times estimated 1995 earnings and yielding close to 4%, says Eric Fry, founder of Marin Capital Management in San Francisco. He figures the stock could gain 23% to $24 a share over the next 18 months. That's a total return of nearly 29%. Though not as cheap, Broken Hill Proprietary (bhp; $51.75) also gets high marks from experts. Australia's largest company, with annual sales of $11 billion, Broken Hill earns nearly half its profits from minerals, a third from oil and gas and most of the rest from steel. "The company is similar to Fletcher Challenge in that it's a great long-term play on Asia," says Fry. Analyst Daniel A. Roling at Merrill Lynch in New York City also recommends the stock. "Broken Hill has one of the best exploration operations in the world for minerals and is well diversified both by type of resource and geographically," he says. Roling thinks the stock, which currently yields 2.1%, could rise 16% to $60 within 18 months, for a 19% total return. -- Telephones in Latin America. The spread of free-market economics has created stock booms in Argentina, Chile and Mexico. And telephone companies have been leading the advances because their business grows in step with the most advanced sectors of emerging economies. Among such stocks, Telefonos de Mexico (TMX; $68) is the clear first choice of the five phone analysts we interviewed. Rizwan Ali at Oppenheimer & Co. in New York City projects that over the next three years, the $9.5 billion company's profits after inflation can grow 12% or more annually. Although TelMex has risen 36% since late 1993, the stock trades at a low 10.3 price/ earnings ratio. Ali and other analysts believe the shares, which yield 1.4%, could rise another 32% to $90 a share over the next 18 months. For investors planning to hold their stocks for two or three years, the pros also recommend $1 billion Compania de Telefonos de Chile (CTW; $114), which owns 95% of the local telephone lines in Chile. "If TelMex is the best bargain, CTC is the highest-quality choice,"says analyst Marianne Bye at Lehman Bros. in New York City. Adds analyst Thomas Melendez at NatWest Securities in New York City: "Because most of its network is digital, CTC is ; technologically ahead of a lot of U.S. phone companies." Over the next three years, CTC's earnings could grow at a 20% clip. The analysts think CTC, which yields 2%, could reach $150 over the next 18 months, a 32% gain from here. And they would be aggressive buyers if the stock pulled back to the $100-to-$110 range. (The stock is usually called Chile Telefonos in the newspaper listings but it often still appears where "Compania" would fall alphabetically.) -- Utilities in Hong Kong. One smart way to cash in on the economic boom in China is to buy Hong Kong utilities. Reason: The British colony is prospering along with the rest of the Middle Kingdom. Moreover, even though China will take over Hong Kong in 1997, analysts say that companies in the colony are less risky than those in China proper. "You have the comfort of investing in a well-established utility," says analyst James McFadden at Bear Stearns in New York City. Further, he notes that the laws governing Hong Kong utilities virtually guarantee them high profits through 2008. "The companies get a return on equity of about 25%, which is a wonderful number," he says. The three top choices among Hong Kong utilities are $2 billion China Light & Power (CHLWY; $5.25), yielding 2.3%; $770 million Hong Kong Electric (HONKY; $3.09), 3.4% yield; and $425 million Hong Kong & China Gas (HOKCY $2.50), 1.4% yield. "Whereas U.S. utilities have earnings and dividend growth of only 2% to 3%, these utilities have 11% to 14% growth," says analyst Edward Tirello at NatWest Securities in New York City. China Power is the largest of the three with the greatest prospects for expansion into China. It's the stock to buy if you can buy only one. Over the next 12 months, Tirello sees China Power reaching $9.62, an 83% gain; Hong Kong Electric at $6.66, 115%; and Hong Kong & China Gas at $4.74, 90%. Unfortunately, the over-the-counter ADRs are frequently omitted from the newspaper listings; you'll have to get price quotes from your broker. However, some newspapers do have listings for the Hong Kong market, and you can get an approximate idea of the ADR price by dividing the Hong Kong price by the exchange rate (the number of Hong Kong dollars to one U.S. dollar -- currently 7.8). That may be a nuisance, but the stocks' enormous profit potential makes it worth the trouble of following them.

BOX: INVESTING OVERSEAS WITH ADRS

It's often impractical for small investors to buy foreign stocks directly. To solve that problem, the J.P. Morgan bank devised American Depositary Receipts (ADRs) back in 1927. These are tradable certificates issued by a bank that holds foreign shares. It's as though the stocks were kept in safe-deposit boxes and U.S. investors bought and sold the keys. All told, some 1,200 ADRs trade in the U.S. You're better off with the third of ADRs sponsored by the foreign companies. They agree to meet certain U.S. standards of accounting and disclosure, which are often higher than their home countries' standards. Most other ADRs are unsponsored, which means the companies don't have to give U.S. investors much more information than they would provide at home.

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