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Bourses Are Bouncing Back


Portfolio diversification, once a cardinal principle for savvy investors, lost its cachet during the past three years as stock markets worldwide tumbled with the onset of a global slowdown. Bonds seemed to be the only sensible investment. But after going through a long trough, most of the world's major economies -- led by a slow recovery in the U.S. -- are finally growing again. Right on cue, stock markets are staging impressive rebounds of their own, from Buenos Aires to Tokyo. So now is the time for globe-trotting investors to take a second look at stocks outside their home markets. ``The global economy is reflating,'' says Udo Rosendahl, European fund manager at Frankfurt's DWS, one of Europe's largest institutional investors. ``The investment outlook is brightening as a result.''

The most encouraging news, of course, is the sudden awakening of the U.S. economy and the impact this has had not only on its own markets but also on others that depend on the U.S. to absorb their exports. The Dow Jones industrial average was up 11.9% as of Aug. 27, while the tech-heavy Nasdaq Composite had jumped 33.2%. The U.S. revival, plus a recent strengthening of the dollar, has given some lift to flagging European markets. But the biggest impact has been in the developing world, particularly Asia, whose markets have been rising for months in anticipation of a U.S. recovery. ``Asian stocks have underperformed,'' says Shankar Sharma, chief strategist at First Global Group, a Poughkeepsie (N.Y.) brokerage. ``Now it's their turn to catch up.''

Yet experts caution against blithely wading into world markets at this point. With many bourses already recording double-digit gains this year, the near-term upside could be limited, since overall economic and profit growth is still far below peak levels of the 1990s. What's more, on average, markets around the world are recovering at close to the same pace. So far this year, the FTSE All-World ex-U.S. Index is up 15.7%, while the Standard & Poor's 500-stock index in the U.S. has gained 13.3%. For some investors, the small spread may not justify the costs and risks associated with converting currencies to buy and sell foreign shares.

But it's important to look beyond averages to extract the greatest value, especially when it comes to the more developed economies in Europe. Strategists point out that a handful of markets -- especially those that fell furthest in the past three years -- are now among the best performers. For example, Spain's benchmark index, the Ibex, is up 19% since the beginning of the year, after dropping more than 58% in the past three. Germany's DAX is up 21% so far this year, India's Sensex 18%, Argentina's Merval 31%, and Thailand's index a staggering 48%. Investors, however, would have been better off avoiding spots such as the Netherlands and South Africa. While a rising tide may be lifting all boats, some are riding higher than others.

Investors around the world looking for bargains shouldn't necessarily turn to the U.S. Projected 2003 price-earnings ratios for companies in the Dow average 22.3. That's almost double the average p-e ratios of 12 in Germany and 11.7 in Thailand. So blue chips in these markets could offer more value to bargain-hunting investors. Even p-e's in Japan, which approached 70 in the late 1980s, have come down to the more reasonable average of 40.3. Ronald Holt, chief investment officer at money manager Hansberger Global Investors in Fort Lauderdale, notes that German chemicals king BASF, with a p-e of 14.5, offers ``the same fundamentals as DuPont or Dow Chemical, but at a big discount.'' Dow Chemical's p-e is 33.9 and DuPont's is 24.5.

If one looks at economics alone, the least attractive region in the world is the euro zone. Germany, France, Italy, and the Netherlands, which together account for more than three-quarters of total euro-zone gross domestic product, all reported shrinking GDP in the second quarter of 2003. Yet seasoned investors see some upside in a variety of European companies, especially big telecom companies and engineering firms such as ABB that have heavily restructured. In addition, European companies that enjoy significant pricing leverage -- Switzerland's Nestl? is one -- should outperform.

Beyond Europe, there are many emerging-market corporations with low valuations and high growth rates that have appeared on stockbrokers' buy lists. Take Hutchison Whampoa Ltd., the Hong Kong port operator and telecom company. Despite concerns over a $16 billion gamble on 3G mobile phone technology, the widely held stock is up 16% so far this year. And it stands to do nicely from a recovery-driven increase in phone traffic and trade across the Pacific, says Hansberger Global's Holt. Overall, the companies poised to do best, most professionals agree, are in technology, engineering, and capital goods -- three sectors well placed to benefit from increased spending in their home markets and stepped-up exports to the U.S.

To be sure, equity prices around the world remain volatile -- and vulnerable to shocks such as the car bombs that rocked Bombay on Aug. 25. But Asia's markets remain resilient: The day after the bomb blast, the Bombay Sensex rose 3.7% and has continued to rally since then. For the first time since 2000, investors can take some comfort that the curse of the dot-com bust has been lifted and that it's possible to make money again in world markets. By David Fairlamb in Frankfurt with Laura Cohn in London, Frederik Balfour in Hong Kong, and bureau reports


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