As international markets ride the wave of tech, telecommunications and media stocks, the question of when to move out of the high-flying industries is troubling some money managers, particularly as U.S. interest rates threaten to climb further.
The good -- but also worrying -- news is that the sectors continue to look strong overseas in 2000, according to a panel of money managers running international stock portfolios at a February discussion sponsored by Pensions & Investments and broadcast over the Internet on the Market Channel. Michael J. Clowes, P&I's editorial director, moderated the discussion.
"It's hard to say when those stocks will stop going up," said Sandra L. Yeager, senior vice president and portfolio manager with Alliance Capital Management, New York.
Managers face a couple of key questions, said J.H. Cullum Clark, director and portfolio manager with Credit Suisse Asset Management and Warburg Pincus, New York. "Which of the telecom and tech stocks are a bubble play?" he asked. He also is trying to pinpoint the companies from "old economy" sectors such as banking, insurance and retail that "will make it in the new world."
Despite their concerns, the managers said they expect strong returns this year for international markets. The predictions, however, varied widely.
Their predictions for the returns of the leading international benchmark for pension funds, Morgan Stanley Capital International's Europe Australasia Far East index, ranged from 10% to 30%.
MSCI's Emerging Markets index could return between 15% and 20%, said Doug Dooley, managing director, emerging markets equity group, at J.P. Morgan Investment Management Inc., New York.
Europe, excluding the United Kingdom, could be at the start of a five- to 10-year bull market, said Michael Levy, managing director and head of international equities with Deutsche Asset Management, New York. Valuations are attractive, and price-earning ratios for most markets are in the mid-20s, he said. European markets also stand to benefit, in the long run, from local pension reform, he said.
Mr. Cullum Clark agreed. Companies in Europe are seeing "superior earning momentum" with a U.S.-style Internet economy taking root. "Over the next several years, earnings will grow."
Ms. Yeager said she prefers Japan over Europe, in large part because of the potential for strong returns on equity there. Now at 2%, ROE soon could move up to 6%, she said.
But her largest holding is not a Japanese company. It's Vodafone Airtouch PLC, the London-based mobile phone giant that is buying Mannesmann AG. Her portfolio is still overweight in the hot sectors. She said, however, that she is broadening the portfolio slightly into bank stocks because "banks in the U.K. are looking cheap."
The growth of the Internet in Europe and Japan will hit other industries, the panelists said. Nippon Television Network Corp., for example, will see an increase in advertising from Internet companies, said Ms. Yeager.
She also has television broadcasters British Sky Broadcasting Group PLC and the Dutch United Pan-Europe Communication NV in her portfolio.
Mr. Levy said that now is the time to buy stakes in companies that are in flux or have links to the Internet. Philips Electronics NV is restructuring, while Telefonica de Espana SA owns a piece of Terra Networks SA, a Spanish-language Internet service provider.
He also owns Siemens AG, the German electronics giant, and Canal Plus, the French leader in pay television.
Mr. Cullum Clark pointed to Bank of Scotland and Lloyds TSB Group PLC as companies that are "finding their way in the new economy." He said that growth in Japanese markets has been driven by such companies as SoftBank Corp. and NTT Mobile Communications Network Inc.
Emerging economies in Asia should benefit as Japan continues to restructure and moves more of its manufacturing overseas, said Mr. Dooley.
Valuations in emerging markets also are attractive, he said. He likes the The First International Bank of Israel Ltd., Mexico's Telefonos de Mexico SA and companies in South America's retail food industry.
But the managers said that they are concerned by the potential for rising interest rates in the United States to hurt Internet and tech stocks abroad.
Federal Reserve Chairman Alan Greenspan needs to balance a rise in interest rates with the need to curtail inflation, said Ms. Yeager.