Non-U.S. stocks seem to be regaining favor as an asset class, after a few years of superior performance. According to Morningstar, international stock funds have posted better results than domestic stock funds for the past one and three years, through September 2004. International funds have returned over 5 percent per year for the last three years while domestic funds gained around 1 percent per year.
Moreover, foreign stocks may continue to lead. The reasons include:
- Global growth. Around the world, economies are growing at 4-5 percent, which bodes well for corporate profits.
- Good values. Many foreign markets are selling well below all-time highs. Combined with rising earnings, this means attractive price-to-earnings, price-to-book, and price-to-cash flow ratios.
- Dividends. Many foreign companies have higher dividends than are being paid in the U.S.
- Comparative attractiveness. Growing fiscal and trade deficits in the U.S. have analysts expecting a weaker U.S. dollar, which would make foreign investments more appealing. High oil prices are another negative for the U.S. economy because the U.S. is a net importer of oil while foreign countries are net exporters.
For these reasons, you might want to hold anywhere from 10 percent to 30 percent of your equity allocations in foreign stocks and international mutual funds.
