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Investing in a strong global market
By Gene Walden
From the Minneapolis Star Tribune 6/12/07)

Housing is down. Gas prices are way up. Yet the stock market continues to climb and the U.S. economy continues to chirp along in a positive direction.

What’s keeping us afloat?

One significant factor is the strong global economy, according to Lissa Rurik, senior investment officer in the Minneapolis office of U.S. Trust. “The slowing signs in the U.S. are offset by the strength of the global economy. We are benefiting from our investments overseas. I think the global economy will continue to be very strong.”

American companies have expanded globally with major investments in operations, products and services throughout Europe, Asia and South America. That global expansion helps keep American companies growing even amidst slowing economic conditions in the U.S.

How long will the global expansion continue? There are some signs that indicate a little weakness in the global economy may be around the corner but there are also some positive trends, according to Rurik.

“We’re starting to see signs of a slow-down in the housing market in Europe,” says Rurik. That slow-down is caused, in part, by increasing interest rates. As in the U.S., countries around the world have been slowly raising interest rates to keep inflation in check.

On the bright side, many European corporations have restructured their operations in the past few years to increase their operating efficiencies. Those steps are beginning to pay off, according to Rurik. “We’re seeing an increase in their margins as a result of their general restructuring of the past few years.”

One other bright spot in the European market is that rising energy costs—which have contributed to a slow-down in the U.S. market—are having less of an impact in Europe. “The difference in Europe has not been as significant as it is here,” says Rurik.

Emerging markets booming
The emerging markets in Asia and Eastern Europe have been on a roll in recent years. “Emerging markets such as in China, Brazil, India, Asia, Russia, Eastern Europe and Latin America have started to industrialize and they are growing very quickly,” says Rurik. “The service sector is also growing.”

There is some concern that stock markets in the emerging world have climbed too quickly in recent years and could be in danger of a correction. China, in particular, is up about 40 percent from its 52-week low, but the market is experiencing increased volatility.

The Chinese market dropped about 15 percent in May, but it is still well up for the year. Part of that correction is due to efforts by the Chinese government to keep the market from overheating. “The government has tried to dampen speculation.” explains Rurik.

Where to put your money

Although the emerging markets have been the best performers in recent years, Rurik is concerned that the run-up in those markets makes them a little less attractive than the developed markets.

“We think some of the emerging markets have gotten ahead of themselves. We like the emerging markets for the long term, but we would probably not be interested in adding to our investment in those markets at this time.”

Instead, Rurik believes the developed countries, particularly in Europe, offer the safest bet for now. She favors large capitalization blue chip stocks over the small caps. “We’ve seen a drop in the growth rate of small cap stocks over the past couple of years. We’re moving toward large cap stocks because they have a better earnings growth rate relative to their earnings history.”

She also believes that the rising interest rates around the world provide a good investment opportunity for income investors. “I would be adding to my bond position because interest rates seem high at this time.” Rurik, however, recommends going with the higher rated bonds and steering away from the high yield junk bonds because of their increased risk.

Global funds

If you want a stake in the global market, there are three primary ways to invest. You can invest in individual stocks from other countries, although it may be difficult to buy and follow those stocks. You can invest in U.S. stocks that have a strong global presence. Or you can invest in international mutual funds.

Some international funds build a portfolio that is loosely representative of the global market while others invest in stocks of a certain region, such as Europe or Asia, or stocks of a certain type of market, such as emerging markets or developed markets.

            Here are three international funds that have enjoyed outstanding growth the past several years:

            Dodge & Cox International Stock Fund. The fund has been up about 21 percent per year the past five years. It invests primarily in blue chip stocks in developed countries, such as Hitachi in Japan and GlaxoSmithKline and Nokia in Europe. It is a no-load fund.

            Artisan International Fund. The fund has its primary holdings in European stocks, although it also invests in Asian and Latin American stocks. The fund, which is also a no-load, has had an average annual growth rate the past five years of nearly 15 percent.

            Vanguard European Stock Index. For investors interested in a pure European play, this no-load fund has had good performance the past few years, with an average annual return of about 19 percent the past five years.



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