INVESTING ABROAD

By Daniel Kadlec

Stock brokers and mutual-fund companies have been harping on the investment opportunities in foreign lands for years, and they keep making it easier to take the plunge. There are 1,200 U.S.-based stock funds that invest overseas or south of the border. Nearly 500 foreign companies, such as Russia's petroleum giant LUKoil and Mexico's version of AT&T, Telefonos de Mexico, list their shares with major U.S. stock exchanges. Those numbers are growing, and Americans are happy to take a flyer. They own $560 billion of stock issued by companies outside the U.S.--a 15-fold increase since 1985.

But given the ongoing turmoil in Asian currency and stock markets and the litany of special risks associated with places like Russia, China and Argentina, some homesick investors may be second-guessing their decision to become players in the ballyhooed global economy. Certainly, the carnage in Asia has been enough to give anyone doubts. In a move most pros didn't see coming, Thailand devalued its currency, the baht, on July 2. Thai stocks promptly skidded 30% and sent tremors through markets in the Philippines, Malaysia, Indonesia, Singapore and Hong Kong. Stock funds heavily invested in the region fell an average 13%, with some--including Landmark Emerging Asia and Merrill Lynch Emerging Tigers--falling more than 30%, according to Lipper Analytical Services.

Who needs this? After all, U.S. stocks are on a tear. And familiar multinational blue chips such as Gillette and Coca-Cola get about half their revenue overseas these days. Isn't that enough global exposure?

Well, no, most experts agree, at least if you have more than a few thousand dollars in the market. For starters, few deny that the rampaging U.S. market is long overdue for some kind of pullback. The benchmark Standard & Poor's 500 hasn't suffered even a 10% decline in seven years, two times the second longest such period. A lot of good things are happening in the U.S. economy, including low inflation and rising profits. But even if U.S. stocks can avoid a tumble, they certainly cannot keep doubling every three years, as they recently did. And even compared with the U.S. market's incredible run, a handful of other markets did better.

In the 10 year period ending July 31, 1997, U.S. stocks rose an average annual 15.3%, including dividends. But Switzerland's market rose 16.2%, Sweden's 16.9%, the Netherlands' 17.7% and Hong Kong's a blistering 19.5%, according to Morgan Stanley Capital International. All those returns are in dollar terms, meaning that's how U.S. investors would have fared after adjusting for the dreaded currency moves.

The world today is one big capitalist playpen, and there are some pretty good companies in most corners of the globe. Want to invest in the world's largest pharmaceutical company? It's Switzerland's Novartis, not U.S.-based Johnson & Johnson or Merck. Have a taste for the planet's biggest food company? It's Netherlands-based Unilever, not home-baked RJR Nabisco or Sara Lee. Biggest farm-equipment maker? It's Japan's Mitsubishi Heavy Industries, not Caterpillar or Deere. Metal goods? Try France's Pechiney, not Alcoa.

And so it goes for dozens of industries. Of the 500 companies around the world with the most revenue in 1996, the U.S. is home to 162--more than any other nation. It also has 31 of the 50 most profitable companies, and seven of the Top 10. But consider that publicly traded U.S. companies account for 43% of the world's stock-market value. If you confine yourself to the U.S., you ignore 57% of the market.

Foreign markets, of course, have their problems, and currency risk is only one of them. There are political risks, especially acute in emerging-market nations where government policy can change with the suddenness of an armed revolt. But the fact is, there just aren't that many coups around the world anymore, and capitalism has a solid foothold from Brazil and Argentina to Russia and China. New governments or policy shifts may cause setbacks, even severe ones, but the long-term risks are much lower than a decade ago.

Disclosure risk is another consideration. When you buy shares not listed with a U.S. exchange, you can't be certain that information on the company is as timely or complete as you might expect. "They just don't understand the importance of full disclosure," says China expert S.L. Chen, who runs a boutique investment bank in New York City under his name. Still, disclosure is much better than just a few years ago, and you should be able to find plenty of foreign stocks among those listed as American Depositary Receipts on the New York Stock Exchange, the NASDAQ Stock Market and the American Stock Exchange. ADRs represent foreign shares held in the vault of a U.S. bank and give owners all the rights of direct stock ownership. They generally are from high-quality companies, and many more ADRs are coming. China just announced plans to convert some 10,000 state-owned companies to public ownership. Many will probably become ADRs. Exchanges view ADRs as a hot growth area.

Investors are by no means confined to ADRs. A good stock broker can buy individual stocks on just about any exchange. And there are always stock funds. For the price of a management fee and possibly a sales commission, investors can hire a pro to try to dodge the next putsch and interpret half-baked financial filings for them.

The main point of foreign investing is gaining some shelter from a market decline in the U.S. while benefiting from the high-risk, high-reward torrid growth of emerging markets as well as favorable trends in other developed markets. Leila Heckman, head of global-asset allocation at Smith Barney, recommends that U.S. investors hold 70% U.S. stocks and 30% foreign. The foreign component should include a small dose of emerging markets in South America, Eastern Europe and Asia. The rest should be spread throughout Europe and developed Asia, including Japan. The overall mix might be 70% U.S., 22% developed foreign markets and 8% emerging markets.

Here are some tips on how to hunt for the best results:

THE PACIFIC RIM. Thanks to a long bear market in Japan and fallout from the currency crisis, this region is about as cheap as any. It is also the region with the lowest correlation to the U.S. market, meaning that stocks there could easily rise even if the U.S. market goes into a long decline. The big problem is that no one knows for sure if the current turmoil is reaching an end. Despite that, Eric Fry, president of the money-management firm Holl International in San Francisco, is jumping in with both feet.

Fry is especially keen on India, where the market has been drubbed, along with others in the region. Yet India's currency has actually appreciated against the dollar, mainly because of its continued prospects for strong economic growth. His favorite stock is chemical company Bombay Dyeing, which trades for little more than the cash on its books and stands to collect a windfall if the government ever lets it develop parts of its massive land bank.

CHINA. This is a market that wants to bust at the seams, so despite shoddy standards of disclosure, investment banker Chen says it makes sense to invest there. To play it safe, he says, buy only the 10 or so Chinese stocks traded in the U.S. as ADRS. The vast majority of companies in China are burdened with excessive debt, but the ADRS are in better shape. His favorites: Huaneng Power, Shanghai Petrochemical and China Southern Airlines.

EUROPE. Many pros believe the Continent is just a few years behind the U.S. in terms of corporate restructurings, cost cutting and providing executives with lucrative stock-option incentives. If they are right, the region is ripe for some strong market surges. Loretta Morris, manager of the Nicholas-Applegate Worldwide Growth Portfolio, is finding dozens of stocks to her liking, especially among export-driven companies benefiting from weakening currencies. Her favorite countries are Germany, the Netherlands and France. Favorite stocks include the French oil company Elf Aquitaine, Dutch electronics-giant Philips and German carmaker Volkswagen.

LATIN AMERICA. Michael Lindell, director of global-stock strategy for GT Asset Management, is bullish on the whole region. He expects a continued recovery from the 1994 peso crisis and believes the region is just starting a two- or three-year up-cycle, which will be fueled by corporate cost cutting. Brazil's Petrobras, an oil company, should be one beneficiary. He also likes paper-goods manufacturer Kimberly-Clark de Mexico and land developer IRSA in Argentina.

Just because it's getting easier to globe-trot with your stock portfolio doesn't mean you have to do it. But as long as you don't concentrate too much in any one region, it can't hurt much, and it might just help a lot.