It looks like investors are ready to take risks overseas. The stock market rebound abroad was different than the one that sent Standard & Poor’s 500-stock index up 16 percent in 2012. In the US the biggest gains were posted for economically sensitive stocks, like shares of banks and other financial businesses. In contrast, healthcare and consumer staples stocks (considered defensive areas) performed the best for most of the year overseas.
In addition, stocks in developed countries were favored by investors over the riskier, but, fast-growing emerging market equities. James W. Paulsen, chief investment strategist at Wells Capital Management, said “The economic situation abroad in the last 12 to 18 months has either been worse or has slowed more dramatically than in the U. S., creating an even bigger ‘risk off’ mind-set in those markets.” However, Paulsen believes that overseas investments are likely to improve as investor’s appetites for risk-taking increases.
Early signs of this are the economically cyclical sectors, such as the fact that financial stocks in the MSCI EAFE index of foreign equities have been outperforming the defensive areas since December. Money managers say that part of this can be attributed to the growing clarity about the state of the global economy. Even though the global economy is not booming, some of the greatest potential dangers seem to have receded.
An important factor playing a role in this shift is that concerns of the euro zone breakup up have subsided. This is due to Mario Draghi’s (president of the European Central Bank) statement that the bank would do “whatever it takes” to save the euro. Jason White, a portfolio specialist at T. Rowe Price said, “In the international markets, you saw the removal of major tail risks last year, particularly in Europe.” Add to this that in China, the Shanghai Stock Exchange Composite Index increased nearly 20 percent. This was a much faster growth than was expected.
Yet according to some money managers, the worst of the economic storms isn’t behind us. “We know that after a financial crisis, it takes a long time to recover. We think a conservative approach is still appropriate: there are still an awful lot of things that can go wrong,” said Simon Hallett, chief investment officers for Harding Loevner. He said investors aren’t looking for economically sensitive stocks from a new sense of euphoria. “This is not a venturesome ‘risk on’ mind-set. Instead investors are reluctantly seeking cyclically oriented stocks because the valuations are so low that they look irresistible. In addition, areas that have been considered riskier may have better values.
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