time to dump america?

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    The United States might not be a very good place to put your money anymore.
    September 30, 2003: 5:13 PM EDT
    By Justin Lahart, CNN/Money Senior Writer

    NEW YORK (CNN/Money) - Throughout the 1990s some of the worst advice you could give U.S. investors was to put their money anywhere but home.

    Sure, there were all sorts of seemingly good reasons to invest abroad -- diversification, incredible growth prospects in developing economies, the forces of globalization. But the U.S. economy grew at an unprecedented clip, and even before you factored in a dollar that strengthened through the decade, U.S. stock indexes trumped all their major foreign counterparts.

    But that was then. Though U.S. stocks have rallied lately, their overseas counterparts have rallied even more. And evidence is mounting that this trend of outperformance will continue. Put simply, the United States is no longer the best place in the world to invest your money. Which raises the question: What place is?

    The rap on the United States these days is that it is a debtor economy, with both the budget deficit and the gap in the United States' trade in goods and services with the rest of the world swelling.

    We are spending more than we make -- a state of affairs that other countries have been glad to finance, but a state of affairs that cannot go on forever. If there was a single message out of the Group of Seven finance ministers' meeting two weekends ago in Dubai, United Arab Emirates, it was that these imbalances must be corrected.

    The natural way to correct them is for the dollar to go even lower. It's an outcome that should eventually make U.S. companies more competitive on price both at home and abroad, narrowing the deficit in goods and services trade. But it also makes U.S. Treasurys less attractive to global investors. This would put upward pressure on U.S. interest rates, and could mean that the U.S. economy won't be able to grow as quickly as it has in the past.

    "Investors should be focused on regions where there are healthy balance sheets and high personal savings rates," said David Rosenberg, chief North American economist for Merrill Lynch. "Areas where there will be appreciating currencies, where there is pent-up demand and where there is an ability among policy makers to spur that pent-up demand."

    The rising star
    The economy that could see its currency appreciate the most against the dollar, and the one with the biggest growth prospects, is clearly China. Although the country has bristled at calls for it to drop or modify the yuan's peg to the dollar, HSBC currency strategist Marc Chandler notes that futures contracts indicate a growing belief that China will capitulate.

    Unfortunately, China is not the easiest place to invest. Most days on the Shanghai B-share market, which trades in U.S. dollars, less than $5 million in shares changes hands. And regulation is nowhere near as tight as in more developed markets.

    "The rising rock star of the world is China, but how do you invest in it?" asked Richard Koss, a global fixed-income manager with Brown Brothers Harriman. "The Shanghai stock market doesn't exactly give you warm, fuzzy feelings."

    The best way may be to invest in other Asian economies generally, on the hopes that their economies will benefit from China's dynamism. A revaluation of the yuan might also prompt other Asian countries, Japan in particular, to drop their efforts to keep their currencies weak, since they would be less able to argue that China's exporters were unfairly undercutting them on price.

    And Japan in particular has been drawing investor attention lately, because its economy keeps on delivering positive surprises. The latest two: Tuesday's reports of a drop in unemployment and a rise in household consumption.

    Europe, despite its reputation for being overregulated and stodgy, could be a surprise. Planned tax cuts in places like France and Germany, along with moves to address labor reform, suggest that the old dog of the world economy could learn some new tricks.

    Germany may have the most potential. Most investors think of it as fat and lazy, points out Lehman global economist John Llewellyn. But those investors fail to recognize that over the past 14 years the country has accomplished a remarkable feat: nearly fully integrating East Germany with West Germany. It's as if the United States had brought two-thirds of Mexico into its tent.

    "It's a fantastic achievement," said Llewellyn. "You feel a great sense of industry there, and you get a sense they're looking toward the next challenge. That's to get greater Germany working again. The political will for structural reform seems to be there."

    History says that while a country may be in favor with investors for some time, this doesn't last forever. The 1970s belonged to Europe (and OPEC), 1980s were Japan's time to shine, the 1990s went to the United States.

    But just because U.S. stocks may not be the best place to be for the next 10 years doesn't mean investors should abandon them, cautions Aeltus Investment Management strategist Jim Griffin.

    For one thing, if you're going to pay for things like groceries, tuition and retirement in U.S. dollars, when you invest abroad you're introducing currency risk to your portfolio. It's great for you if the dollar goes down, raising the value of these foreign investments. But what if the dollar strengthens?

    For another, no economy has taken the pole position from the United States yet, and what the future will bring is unknowable.

    "Everybody recognizes that the U.S. is the global hegemon, and it's pretty hard to root for the Yankees," he said. "But the champ is still the champ until somebody else takes the crown."
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