I read with some surprise the Nov. 13 commentary by Ullrich S. Moser on the rise and decline of international investing. Was it serious?
The comment that neither Japan nor Europe would be fundamentally attractive for the foreseeable future is fine but for the facts. Japan has completed the painful process of squeezing out of its system most of its pricing excesses which has seen the stock market and property prices fall by over 60% and is now set for a period of strong recovery lasting to the end of the decade. As for Europe, it is less than halfway through one of the healthiest low inflation recoveries seen in 25 years.
Mr. Moser may be quite right in saying we are entering a period of sustained dollar strength, but surely he is aware that modern investment techniques have provided the U.S. investor with hedging instruments that can protect him from currency losses. Indeed, the strength of the dollar is the last reason for not investing internationally as foreign companies become more competitive vs. U.S. companies and they also enjoy higher profits from sales in the U.S. thanks to the translation effect. The dollar strength is also helpful in easing currency strains in Europe, as it takes upward pressure off the deutsche mark, creating a more benign atmosphere for interest rate cuts.
My surprise turned to amazement when I read that Europeans had closed their eyes to rising public debt. I cannot believe Mr. Moser is oblivious to Maastrict and the efforts being made by European governments to meet its budget deficit criteria. Even notoriously volatile and ill-disciplined Italian politicians realized the need to tackle the problem and appointed Dini for the sole purpose of finding a solution. It is just possible Mr. Moser may have also noted the recent resignation of the French government motivated by the need to create a smaller cabinet focused on reducing the budget deficit.
The statement that for the past 10 years the U.S. stock market has outperformed the MSCI EAFE index is simply not correct. At the time of writing on Nov. 17, my data show the EAFE to have risen 217% vs. 201% for the Standard & Poor's 500 Stock Index. It should also be borne in mind that the international markets have a low correlation with the U.S. market so a U.S. portfolio's volatility is reduced by investing a part internationally.
I will not bore your readers by going on and on; suffice it to say Mr. Moser is wrong in considering international a losing strategy. It has an important part to play in the portfolio of a U.S. investor, particularly today with the U.S. economy being closer to the end of its cycle and its stock market at record highs while the international economies are at an earlier stage in the cycle and their stock markets, particularly Japan's, less demandingly valued.
I do hope not too many of your readers took Mr. Moser's article seriously. The international stock markets and economies account for two-thirds of both the world's market capitalization and gross national product. It would be a very myopic U.S. investor who ignores the opportunities offered by such a huge area for investment.
President and chief executive officer
TCW London International Ltd.
Poor performance, more trouble ahead
In reply to Robert Rawe's letter, whereas my Nov. 13 commentary doesn't try to make short-term assessments or forecasts, I beg to differ from Mr. Rawe's views, among others:
1. Japan will have "completed" its period of price excesses only when real estate prices stop falling. Until then, that statement is just wishful thinking. Some 30% of Japanese households have mortgage debt that is higher than the value of their assets. It remains to be seen whether in that environment, it is poised for a "strong lasting recovery."
2. German retail sales are 5% below last year - and I have not seen so many Germans spending their overvalued deutsche marks here in the United States to account for the drop at home. Is that the European way of a "healthy recovery"?
3. With the benefit of perfect hindsight, the recent French turmoils show repairing the deficits is not the accepted Goal One - quite to the contrary.
4. I am unable to reconcile Mr. Rawe's numbers. As of the end of November, the 10-year total return of EAFE was 14.03%; the Standard & Poor's 500 returned 15.19%; and the MSCI U.S., 15.2%. But even more important is the outlook: it is a simple fact that the big overperformance of EAFE happened before 1987 - and as these quarters are dropping out of the 10-year time frame on which the argument for international investments was largely based, the negative performance gap will increase significantly.
5. EAFE investments have not only cost performance, they have also - in contrast to Mr. Rawe's assumption - done little to reduce risk. As of Sept. 30, the least risky portfolio was 87% U.S. and just 13% EAFE. And as of year-end 1995, that number falls to single digits!
U.S. pension plans and their consultants have not gone overseas just for hope and short-term market assessment. They have applied a good systematic approach. I expect them to continue along those lines - and fortunately, strategies can be developed that accommodate their requirements.
Ullrich S. Moser
Moser Advisors Inc.