By Sam Mamudi, MarketWatch
NEW YORK (MarketWatch) -- While much of the focus of the past year was on the carnage in U.S. markets, the biggest hit to many investment portfolios came from international stock holdings.
Popular mutual-fund categories such as Latin America and emerging markets, which had previously powered investor returns, tumbled hard in 2008.
International stock funds lost 44.9% on average in 2008, according to preliminary figures from investment researcher Morningstar Inc -- worse than the 37% slide for the benchmark U.S. Standard & Poor's 500 Index /zigman2/quotes/210599714/realtime SPX +0.75% .
For investors accustomed to stellar overseas gains and the portfolio diversification it promised, international-fund returns in 2008 -- or the lack of them -- was a rude shock.
"The myth of international decoupling has been put to rest," said Uri Landesman, head of global growth at ING Investment Management, a unit of ING Groep /zigman2/quotes/203566071/composite ING -0.08% .
But as 2009 begins, there are reasons to hope that the horrific numbers of the past year are a thing of the past.
"We're finding [such] a large number of stocks to invest in right now that we think 2009 will be a good year," said Gary Motyl, chief investment officer of Templeton Global Equity Group, part of Franklin Resources Inc. /zigman2/quotes/201997162/composite BEN +0.34% .
Motyl did temper his positive outlook by adding that he expects a "subdued" start to the year.
"You can find stocks with real good business models that have been beaten up as much as those that don't," said John Maxwell, co-manager of Ivy International Core Equity Fund /zigman2/quotes/204541858/realtime IVIAX +0.80% . But echoing Motyl's caution, Maxwell said that his portfolio is still "more defensive" in its composition.
Down and out
Subdued would be a marked improvement over what took place in 2008, when the three worst-performers of all stock-fund categories were in the international sector, according to Morningstar. The losses were so bad, the three-year annualized return numbers for all international funds plunged into negative territory -- down 8% on average -- despite what had been stunning results for most of the decade.
The worst of the lot was Latin America funds, down 59.8%. Three-year annualized returns were off 2.4% -- reflecting the category's runaway performance until late 2007.
Also at the bottom of the performance rankings were emerging markets funds, down 53.8%. Emerging markets funds, for so many years the darling of U.S. investors, now sport three-year annualized losses of 6.3%.
Motyl takes a philosophical view of 2008's woes.
"You can't have enjoyed the fruits of globalization over the past 10 years and not expect" a downturn, he said.
Perhaps Motyl can take that view because he's looking ahead to future gains. He said that the recent market declines offer many welcome buying opportunities.
"The market's not differentiating between quality stocks and those that aren't doing well," Motyl said. "It's a great time to look at big, well-capitalized stocks."
Motyl mentioned Taiwan Semiconductor Manufacturing Co. /zigman2/quotes/204359850/composite TSM +1.97% as an attractively priced stock for a company that's cash-rich and "well-positioned to beat its competition."
Ivy's Maxwell, meanwhile, named Nestle /zigman2/quotes/210131093/composite NSRGY +0.59% as a favorite. "It's still cheaper than most consumer staples, with a very good balance sheet and dividend payouts," he said.
He also likes Japanese video game giant Nintendo Ltd. /zigman2/quotes/201616881/composite NTDOY -0.67% . "It's down 50% this year, but one-quarter to one-third of its market capitalization is in cash and the Wii [gaming] console is one of the few things that kept selling over the Christmas period."
Landesman said European mining companies should have a good year because they have been "dramatically oversold" and will also benefit from coming infrastructure spending by national governments and inflation in those countries. Spending and inflation should also boost the infrastructure sector in Europe, he added.
Landesman expects China to bounce back in 2009 and predicted that it will "surprise" in the second half of the year. Pacific-Asia funds that invest outside of Japan lost 52.8% on average in 2008.
"We'll see Chinese growth closer to 8% of gross domestic product than the 5% that the market is pricing," he said. "They have a great balance sheet and are at a much stronger jumping off point than the U.S."
While China may lead the way, Landesman views other BRIC (Brazil-Russia-India-China) countries favorably, too. Expected commodities price gains later in the year will boost Brazil and Russia, he predicted. As for India, "it's in a pretty good place for the long-term [because of rising domestic demand] but with the proviso that higher commodities prices will hurt."
"China, Russia and India have fallen back to levels where their stocks fall into the strong hold/attractive to buy category," Franklin's Motyl said. "We're excited when we look out one, three or five years."
"You can buy a Japanese automaker with good products and a strong supply chain for three or four times earnings right now," Maxwell added. "When things turn around and we're on the up again, that should grow to 10 or 11 times earnings."
"I don't think anyone really has an idea" about what will happen in the coming year, said Bill Rocco, analyst at Morningstar Inc.
"If you're an international investor, you should continue to focus on the long term and rebalance your portfolio so that the funds you hold still fit your strategy," he said, suggesting investors consider international managers with a "good, broad-based style that can pick and choose [stocks] as they see fit."
And despite the hope many managers display, there are some areas they say should be avoided in 2009.
"Japan is like the General Motors Corp. of countries," Landesman said. Low demand coupled with a high currency and an aging population has created the "perfect storm of a disaster." In 2008, funds that focus solely on Japan lost 34.1% on average.
Landesman is also wary of European markets overall. "There's not a lot of opportunity in mature Europe [aside from mining and infrastructure]," he said, and blamed the European Central Bank for spurring what he said will be a recession that lasts longer than the U.S. contraction.
"The ECB needs to cut rates and cut them soon. What they're doing is just guaranteeing a long period of pain," Landesman said. He added that the strong euro will also hurt European countries trying to kick-start their economies through exports.
Maxwell, the Ivy fund manager, agreed that the ECB's actions have fallen behind its international counterparts. "The U.K., U.S., China, Japan and Australia are all being very aggressive. In that sense the ECB does stand out from the crowd," he said. But some parts of Europe are in better shape than other countries. "The consumer in France and Germany just wasn't that levered," he said.
The average Europe-focused stock fund lost 47.6% in 2008.
Maxwell said he's cautiously hopeful for 2009. "I would guess that by the end of the year it would be an 'up' year," he said.
That could still leave investors a long way from recent highs. "It would take an upward move of about 80% to get us where we were 14 months ago," said Landesman. "I don't think we'll see a new high in the markets for about five years."
Landesman said that international stocks and funds may continue to lag the U.S. "The U.S. is probably going to be a good place to be [in 2009]," Landesman noted. "There's a reasonable chance that it'll do better than international." See related story on U.S. stock fund performance.
Maxwell said economic improvement in the U.S. should also lift companies that export to America, including Japanese automakers and European manufacturers.
"Europe might not be trying to reflate their economy," he said, "so much of [the upturn] will come from the U.S. restarting and getting the world economy going again."