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No ‘sure thing’ in foreign markets

Marketplace Staff Jan 25, 2008

No ‘sure thing’ in foreign markets

Marketplace Staff Jan 25, 2008


Tess Vigeland: Aren’t foreign investments supposed to diversify your portfolio? If that’s the case, then why are Asian and European markets yo-yoing right along with Wall Street?

The conventional wisdom over the last year or two has been that emerging markets weren’t as tied to the U.S. economy as they used to be.

Here to help us figure it out is Money Magazine’s Eric Schurenberg:

Vigeland: Eric, is that still the case?

Eric Schurenberg: That assumption is still basically true, but it doesn’t protect you when there’s a global contagion like we’ve seen in the past few days.

Vigeland: So is it possible to say why the sudden change this week?

Schurenberg: The reason the markets have fallen off a cliff is that everyone is now convinced the U.S. economy is headed towards a recession. They’re trying to get out of the way of that as fast as they can.

Vigeland: Right, but the U.S. markets have been falling since the beginning of the year, and it’s like, all of a sudden, this past Monday, the rest of the world said “Uh oh!”

Schurenberg: No, I think that’s right. I think they finally realized there’s nowhere to hide for them either, that if the U.S. economy really went into recession, it would drag down their earnings — we’re their biggest customer!

Vigeland: Then what kind of advice should investors take at this point about investing in emerging markets. Again, China, India — is it still a good idea?

Schurenberg: Oh yes, it’s still a good idea. Now, there are some reasons you don’t want to do it. You don’t want to do it because it will protect you in a down market in the U.S. market. Clearly, it won’t. You don’t want to do it because you’re convinced that international markets will always outperform the U.S. market. That won’t happen forever, either. But, you should do it because it gives you chance to take advantage of opportunities elsewhere in the world and you want to do it because, inevitably, the U.S. is going to decline as a global economic power, not because the U.S. is doomed, but just because the rest of the world is growing faster and catching up.

Vigeland: So, if you’re watching the world markets tank right now right along with the U.S., what should you do with your current foreign holdings in your portfolio, especially, you know, the ones that did extremely well last year and you’re seeing those kind of get chopped off at the knees?

Schurenberg: If you’re a long-term investor, when you signed up for these investments, you signed up for an asset that could take a nose dive like we’ve seen. I think the right thing to do is not to panic.

Vigeland: I wonder, for those who really did decide to jump in to emerging markets in their mutual funds or what have you and are now paying the price for that, there must be a lesson there that there are manias all around us and perhaps this was one of them last year. You kept hearing “you’ve got to get into China, you’ve got to get into India,” and now we’re seeing the lesson that you’ve got to be careful if you do that.

Schurenberg: That is for sure. These are risky markets. This shows you that there is truth in the old economic saying “if something can’t go on forever, it won’t.” I think that in the long run, these will still be good investments, but at the moment, it hurts.

Vigeland: Eric Schurenberg is the managing editor at Money Magazine. Thanks so much for your time.

Schurenberg: My pleasure, Tess.

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