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April 1, 2011, 4:17 p.m. EDT

International stock fund investors’ dizzying spin

Europe thrills, emerging markets chill in rocky quarter

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By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) — As sellers dumped any stock stamped with “Made in Japan” in mid-March, mutual fund manager Martin Jansen hung on to his portfolio picks.

“We had a few heart-stopping moments,” said Jansen, New York-based head of international equities at ING Investment Management, whose portfolios were positive on Japan due to mostly to its being such a beaten-down market in recent years.

“The inclination is to drop everything, as you feel you’re very vulnerable, but at the end of the day, it’s a little more rewarding to stay where you are,” Jansen said about the Japanese stock position.

Stock buyers, beware

Middle East upheaval and questions about U.S. economic strength cloud the outlook for stocks, says Bernard Baumohl, chief global economist at The Economic Outlook Group.

Mr. Market's wild ride
Mutual fund and ETF investors rode a wave of market volatility and the first quarter ended with the strongest showing for U.S. stocks in more than a decade. But what if this is as good as it gets?
Bond funds: Wintry grip of rate worries
International funds: Thrills and spills
See the full special report
/conga/story/2011/03/q1 funds.html 137675

The devastation in Japan — the world’s No. 3 economy — was one of many challenges international stock mutual fund and exchange-traded fund shareholders faced in the first quarter, which saw revolution in the Middle East and North Africa, rising oil prices, and the threat of a global market slowdown.

As a result, international markets put in a mixed performance for the first quarter. The average diversified international stock rose 3% in the period, according to preliminary data from investment researcher Morningstar Inc. That paled against an average 6.6% quarterly gain for comparable U.S. stock funds.Read more: U.S. stock funds, ETFs bounce ahead.

A weak U.S. dollar lifted European shares -- diversified Europe stock funds added 5.3% on average — and commodity prices rose on Middle East tension, driving up Russian stocks. Russia-heavy Metzler/Payden European Emerging Markets Fund and ING Russia Fund /zigman2/quotes/203768763/realtime IIRFX -4.88%  each added just over 10% in the quarter, while Eastern European Equity Fund   rose 9%, according to Morningstar.

Russia proved a saving grace for emerging markets; diversified emerging-markets stock funds eked out a 0.5% quarterly gain amid worries about food prices and moves by some central banks to fight inflation. Meanwhile, China-focused funds finished the period flat, and Latin America funds lost 0.9%.

The quarter’s top-performing international stock fund was New Alternatives Fund /zigman2/quotes/205609700/realtime NALFX -0.38%  , gaining 15%. The worst performer: The USX China Fund  , down 24.9%.

Oil and emerging markets

Still, emerging markets remain attractive to Jansen and other investment managers.

“It may take another three to four months before emerging markets really get going,” said Jansen. “Valuations and long-term growth prospects are getting interesting.”

Alexander Young, equity strategist at Standard & Poor’s, said investors have gotten used to too many blockbuster quarters from emerging markets.

“Investors are like spoiled brats. Emerging markets have done extremely well. In 2009, they were up 80%, so not everything outperforms every week and every quarter,” he said.

Many issues have been weighing on emerging markets, Young pointed out, such as food price inflation and worries about central bank tightening. But such challenges tend to subside over time, he added.

Vincent Treulet, head of investment strategy at BNP Paribas Asset Management in Paris, agreed. He said his firm prefers emerging markets for at least the balance of the year.

“Valuations in emerging market equities look fairly cheap at the moment versus developed markets, based on forward price/earnings of a 10% to 15% discount versus global equities,” he said.

“In terms of countries, the two big ones we prefer are China and Russia, based on two things: cheap markets and oil prices. Both markets are cheaply valued; in the case of Russia, high oil prices are supportive” Treulet said.

US : U.S.: Nasdaq
$ 0.39
-0.02 -4.88%
Volume: 0.00
Sept. 30, 2022
US : U.S.: Nasdaq
$ 68.95
-0.26 -0.38%
Volume: 0.00
Sept. 30, 2022
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