For Investment Opportunities, Look Abroad

The long winter for international-fund investing appears to bedrawing to a close, and bulls are starting to come out ofhibernation.

Foreign stock markets are warming up and the dollar hasstabilized in value - two factors that helped international funds toan average gain of about 8.8 percent during the first quarter of1993.

Encouraged by this apparent thaw, several investment pros whohad been neutral or negative have boosted their overseas exposure inrecent weeks.

"International funds are in an uptrend," says Tom Lydon, avice president at Fabians' Telephone Switch Newsletter of HuntingtonBeach, Calif. "We believe now's a great time to get in."

Based on positive price movements in recent weeks, theadvisory service on March 19 told its 43,000 subscribers to move intoselected international funds - the first buy signal for the groupsince July, 1992.

"This area is way overdue for some gains," says Lydon, notingthat two of the past three calendar years have been downers for theforeign funds.

Jack Bowers, editor of the Fidelity Monitor newsletter inRocklin, Calif., has in the past three weeks flashed a buy signal forFidelity's Diversified International Fund and the Fidelity CanadaFund, his first purchase recommendations for any foreign portfoliossince late last year.

"I'm starting to warm up to international funds," says Bowers,who generally prefers to stick with U.S. equity investments.

At current levels, stock prices in this country will likelyappreciate at a slower-than-normal rate, he says, adding thatinterest rates have more room to drop in various other countries.

Germany, in fact, trimmed its key discount rate half a pointto 7.5 percent on March 18 in response to sluggish economic activityin Europe.

That move affirms the trend to lower European interest rates,says George Murnaghan, a vice president at T. Rowe Price Associatesin Baltimore.

Certain mutual funds have boosted their holdings of foreignstocks of late. The GAM International Fund, for instance, now has 68percent of its assets in foreign-equity holdings, up from 46 percentat yearend.

GAM International has relatively large investments in emergingAsian markets, notably Hong Kong, which accounts for 22 percent ofthe portfolio's holdings. The fund also is high on Singapore andMalaysia, but has only a 4 percent stake in Japan, which until lastquarter was a major disappointment in terms of stock marketperformance.

Then there are firms like T. Rowe Price, which was bullishabout the international outlook prior to this year and is even moreoptimistic now. "The U.S. is one of the few markets in the worldclose to its all-time high," says a recent T. Rowe Price report oninternational investing. Foreign stocks, the report predicts, willsoon start to pull ahead of U.S. equities - something that hasn'thappened on a yearly basis since 1988.

The emerging economies of the Asia/Pacific region are stillgrowing at an impressive 6 to 7 percent annual clip, Murnaghan says,and several Latin American countries are making progress.

And while the European economies are still flat, those marketsoffer more bargains than the United States, he adds. T. Rowe Pricesees a significant decline in European interest rates this year,"which should unlock those stock-market values for the patientinvestor."

It's likely more professionals would favor foreign investingif it weren't for the currency risk. A rising dollar tends toundercut the values of international and global funds, although aslumping greenback produces the opposite result.

Given that the United States has emerged from recessionearlier than many leading foreign economies, C. Beth Cotner, aportfolio manager for Kemper Financial Services in Chicago, figuresthe greenback will remain strong at least into the third quarter of1993.

"The times you make the most money in foreign markets is whenthe dollar's falling, not rising," Cotner says. In her view, foreignstocks appear somewhat more attractive than they did several monthsago, but she hasn't materially boosted her international holdings dueto the strong-dollar threat.

Because of currency movements, which are difficult to predict,Bowers suggests that investors view international funds as aggressiveplays that shouldn't total more than 25 percent of a person'sportfolio.

T. Rowe Price, however, minimizes the dollar impact out of abelief that currency movements don't exert more than a secondaryinfluence over time. Besides, says Murnaghan, the dollar's long-termtrend likely will be downward, given our budget and trade deficits.