why have other markets fallen more than the us

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    brains checked at the border?


    Woes Here. Opportunity Elsewhere.

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    Published: April 12, 2008

    A CRUCIAL argument for investing abroad is that if the United States suffers a downturn, the vigorous march that other economies are making from the third world to the first will keep them and their stock markets growing stoutly. The buzzword is “decoupling.”

    But it has not worked out that way lately. As the United States sinks toward or through recession, stocks are dropping more overseas than here, with the heaviest declines coming in markets like China and India, which are thought to be the biggest beneficiaries of decoupling.

    Jamie Doyle, a manager of international portfolios for Causeway Capital Management, advises against giving up on the decoupling concept or on foreign stocks generally, however. When he looks at the comparative weakness of European and Asian stocks this year, in fact, he wonders whether investors have checked their brains at the border.

    “It’s the craziest thing about the global equity markets this year,” considering that “all the problems are emanating from the United States,” he said. The discrepancy is “something of a mystery” to him, and he finds it a buying opportunity.

    Mr. Doyle suggests seeking out foreign companies with minimal exposure to the American economy, but also companies whose dependence on American consumers is so obvious that the throng of opportunistic sellers would have sent prices well below fair value.

    AN example of the first is TNT, the privatized Dutch postal service. The stock has tumbled, leaving it trading at roughly 9 times earnings and with a 4 percent dividend yield.

    Two companies that are particularly susceptible to an American slowdown, but whose stocks he thinks have been treated far too harshly, are Honda and HSBC.

    Honda, the Japanese carmaker, has been hit by weakness in consumer spending, and by strength in the yen, but the company keeps gaining market share in the United States, Mr. Doyle said.

    As for HSBC, he noted that it is one of the most diversified institutions, geographically and by business segment, and it trades at about 10 times earnings and yields about 5 percent.

    John Maxwell, co-manager of the Ivy International Core fund, offered an eclectic list of foreign stocks that he considered bargains, including Nestlé, the world’s largest food producer; Informa, the British consulting and media firm; Svenska Cellulose, a Swedish paper producer; and the Japanese conglomerate Mitsubishi Electric.

    Nestlé derives 40 percent of its sales from emerging markets, making it a safe decoupling blue chip. Svenska Cellulose, which recently bought some of Procter & Gamble’s European operations, is a restructuring play.

    Mr. Maxwell finds Informa just plain cheap. The company continues to meet earnings estimates, yet the stock has fallen close to 30 percent this year, leaving it trading at 9 times earnings.

    The appeal of Mitsubishi is that it is a Japanese company run like a Western one, with attention paid to cash flow and productivity. “The thing that separates them from the other guys is they’re disciplined on the financial front,” he said.

    Charles de Lardemelle, chief investment officer of International Value Advisers, says he has no trouble identifying bargains overseas, including many that are well insulated from weakness in the United States, either because they do little business there or because their products are must-haves.

    One favorite is the French drug maker Sanofi-Aventis, which Mr. de Lardemelle said had become so cheap that the price assumes the company will introduce no significant drugs in the next three or four years.

    Two other choices are Asian phone companies, NTT DoCoMo in Japan and SK Telecom in Korea. He described them as “cash machines that are No. 1 in their industry.”

    He, too, is baffled by the weakness overseas, and he agreed with Mr. Doyle that sellers of international stocks need to adjust their thinking.

    “It’s the U.S. economy that’s in the worst possible shape looking out 6 to 18 months,” Mr. de Lardemelle said, “yet international markets have fallen much more.”
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