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June 29, 2003, 9:43 p.m. EDT

International funds piggyback U.S.

Second quarter sees Israeli, German stocks on top

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By Barbara Kollmeyer, CBS MarketWatch

LOS ANGELES (CBS.MW) -- When the U.S. markets catch a cold, the world catches pneumonia. And when stocks are feeling better stateside, the rest of the world can expect to recuperate as well.

Indeed, world equity funds returned 19 percent overall in the second quarter, edging out an 18 percent return for U.S. diversified equity funds, preliminary data from Lipper showed Wednesday. Top-ranked funds returned nearly 40 percent, as U.S. dollars poured into regions such as South Korea and Europe.

"There was a great fear in Europe that if the American economy was not doing well, then maybe we would have a global recession. Now that the equity market in the U.S. is anticipating the American economy will do better in the second half, there has been a sigh of relief in Europe," said Jean Marie Eveillard, who manages the $2.1 billion First Eagle Overseas A fund /zigman2/quotes/209014684/realtime SGOVX +0.35% .

The top performing international fund was the $6.8 million Amidex:35 Mutual fund , which concentrates on U.S.-listed Israeli stocks, with a return of 39.4 percent, preliminary Lipper data from Thursday's showed. A close second was IShares Germany /zigman2/quotes/204789209/composite EWG +0.09% , which returned 38.4 percent, with $103.6 million in net assets.

Martin Vostry, research analyst at Lipper, said for countries in the Far East or those that rely on imports or exports to the U.S., a better stateside performance has helped.

"It's also a case of lower risk aversion and going into markets that are generally more volatile," said Vostry, on the view that investors may well be losing their fear of looking abroad for stocks.

International funds performed far better in the second quarter than they did in the first three months of the year and were well ahead of the second quarter of 2002. World equity funds fell 7.4 percent in the first quarter and were down 3.9 percent in the second quarter of 2002.

As for whether the good times will continue to roll into the third quarter, analysts and fund managers are guardedly optimistic, saying much hinges on how well U.S. markets perform.

Good vibrations

Across the globe, the combination of the start of peace talks and a better performance for global markets, especially the Nasdaq, boosted Amidex: 35's portfolio, according to Gadi Beer, consultant for managing the Israeli stock fund.

"Even though there are a lot of political issues, (investors) can differentiate between that and the equity market. Tel Aviv performed better than the Nasdaq, about 35 percent up year to date. That's partially in the time where we had bombings almost every couple of weeks," Beer said.

Big performers for the fund have been generic drug maker Teva /zigman2/quotes/205657894/composite TEVA +4.92% and Taro Pharmaceuticals /zigman2/quotes/203101845/composite TARO +1.58% .

Beer doesn't think the rally is exhausted either. "There's a lot of money that's still waiting to come back to Israel...once Israel deals with the political aspects. So I don't think we're at the peak yet."

For the second best performer, Germany -- Europe's biggest and most troubled economy-- Vostry said a vast underperformance in the first quarter meant that the markets were due for some kind of bounce, albeit from a lower level. He notes that Germany's DAX Xetra 30 index fell 16.2 percent in the first quarter, versus a 4 percent fall for the Dow /zigman2/quotes/210598065/realtime DJIA +1.05% .

"The economy in Germany is still looking very sluggish...they're facing deflationary pressure, so economically, these aren't very good times for Germany. But financial stocks have done well," said Vostry.

Currency appreciation has also helped European regional funds gain 22 percent this quarter, said Vostry. The euro is up nearly 25 percent against the dollar in the last 12 months.

Asia and small caps

The third best performing fund was the Matthews Asian Korea fund /zigman2/quotes/210554294/realtime MAKOX -0.23% , with assets of $180.7 million and a gain of 35.7 percent, as of Thursday's preliminary Lipper data. Samsung Electronics SSNGY 0.00% and Hana Bank are two of the fund's biggest holdings.

The Lipper Emerging Market Fund index gained 23 percent in the quarter, preliminary data showed. And South Korea has been a popular spot for investors as this market has garnered more interest, said Lipper's Vostry.

"A lot of people are thinking that the Asia markets are undervalued relative to Europe and North America. The geopolitical issues are always a question mark as to how that will play out. During the first quarter, South Korean shares fell substantially," he said.

Vostry said Latin America has also been a dark horse over the past two quarters. "There has been a lot of demand, especially in Brazil following the election last October and the economy stabilizing. The Brazilian government has got inflation under control. There's a lot of optimism in Brazil right now."

The second quarter's fourth best performing fund was the Oppenheimer International Growth fund , which gained 34 percent and fifth was the Fidelity Adv Korea fund , up 33.9 percent, according to preliminary Lipper data.

Also worth noting, the International Small Cap Fund Index rose 21.4 percent in the latest quarter, preliminary data showed, beating out a 19 percent rise for its larger-cap counterpart. Vostry said the rising interest in international small caps, especially in Europe, comes on the heels of similar U.S. gains.

"We're seeing a very strong bounce back, given how undersold they were in the past 9 months or so -- it's been a very weak period for two or three years now," said David Herro, who manages the $400 million Oakmark International Small Cap Fund /zigman2/quotes/201098659/realtime OAKEX +0.40% , which is closed to new investors.

One of Herro's best performers has been Pfeiffer , a vacuum-technology group from Germany, which is up 40 percent in the quarter to date, aided, he admits, by a currency boost.

"Some of these stocks were excessively underpriced. We still think there's significant upside out there, even though it's in Germany, which is not an exciting market. Germany had a decent second quarter which gives you an indication that if you find the right gems in the small-cap universe, there are profits to be made," Herro said.

A peek ahead

Fund managers and analysts alike warn of volatility ahead and advise keeping a sharp eye on the U.S. economy, which will continue to direct global market traffic in the coming quarter. But guarded optimism is not hard to find.

"Using valuation as our guide, we still think stocks are excessively undervalued, especially when you consider where we are in the economic cycle," said Oakmark's Herro.

"Who knows, maybe equity markets on the whole are just starting to rebound from a three-year sell-off, which was necessary in my opinion. So look at what's happened in three years: share prices have dropped, interest rates have dropped, earnings at worst have held steady. There are a lot of attractive stocks around the world," he said.

Added Vostry: "There are good signs. One is that the breadth of the market rally has been very wide. Just about every Lipper equity group has risen in double digits this quarter and it's been a very long time since that has happened. The fact this is a wide-ranging rally shows optimism on the part of investors towards the future."

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