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Invest Style

End of 'home bias' boosts foreign stocks

Signs of growth overseas merits attention

CHERYL DEVOE KIM

Globe Investor Magazine Online, March 4, 2009

While North American stock indexes continue to flop about, stock markets in other parts of the world have posted gains of more than 20 per cent from their lows in October. Chile's Indice de Precios Selectivos has gained about 27 per cent, Brazil's iBovespa index has climbed 42 per cent, while the FTSE Xinhua 200 in China has risen 51 per cent from its 52-week low.

So should savvy investors take their money out of North American markets and seek out the greener pastures of emerging markets? Or have the truly savvy ones already done so?

Fund flow data from EPFR Global, a Cambridge, Mass., company that tracks fund flows and asset allocations, show that fund managers worldwide have moved about a total of $1.2-billion into Brazil from other countries since late December, $1.14-billion into China since mid-November, while funds invested in Chile are little changed since the fall.

Investors are increasingly willing to include international holdings in their portfolios as they become more sophisticated, said Brad Durham, EPFR's co-founder.

"They call it the ending of the home bias," Mr. Durham said.

In Canada that trend has been aided by the end of foreign content rules in retirement savings plans.

And while emerging markets may still test the fortitude of one's stomach, they are quite different from 20 years ago, said Mark Mobius, president of the Templeton Emerging Markets Fund. Improved market liquidity, regulation, transparency, shareholder rights and accounting standards have all made these markets more realistic investments for the average investor, he said. But a balanced portfolio is key, Mr. Mobius said, since individual markets' movements can be dramatic in either direction. The Brazilian main index, for example, fell 60 per cent in the five months from May to October last year.

That said, although individual markets may still be risky, in a balanced portfolio they provide access to economies that are growing at twice the rate of the developed world, Mr. Mobius said.

Indeed, Brazil, Chile and China are all forecasted to post GDP growth in 2009, though slower than in past years. China's growth is predicted at about 6 per cent this year, which for any Western country would be astronomical. These countries also boast governments that are seen to be in a position to manage the economic slowdown with effective fiscal and monetary policy.

The New York Stock Exchange's website is a good place for initial research on investing in these countries. An index sorts stocks by country, and provides summaries of the companies with American depositary receipts available, generally the biggest companies from their respective countries. Buying ADRs is no different than buying any other share on the NYSE, and they trade in American dollars.

There are 44 Chinese companies listed on the NYSE, 38 from Brazil and 13 from Chile. For those who don't want to pick individual stocks, there are many exchange-traded funds available, both country-specific, regional, and ones that focus on the "BRIC" countries, specifically Brazil, Russia, India and China.

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