Broker Talk: Investing Abroad

With the U.S. dollar continuing its downward spiral, some brokers are telling investors to look abroad for better returns.

Who’s Talking: Fidelity’s Market Analysis, Research and Education Group

The Gist: Foreign stocks have outperformed U.S. stocks in years when the dollar fell. The rule applied in 2009 and should continue to work into 2010.

Investors are looking for investment strategies that protect against the decline in the U.S. Dollar. If history is any guide, foreign stocks have outperformed U.S. stocks in years past when the dollar has fallen, Fidelity’s Market Analysis, Research and Education Group says. Over the past decade, foreign stocks outperformed U.S. stocks during the six years when the dollar lost value compared to other major currencies. As the dollar drops, foreign currencies appreciate and provide an extra boost in returns when the foreign securities are exchanged back into dollars again. What’s more, the more the dollar drops, the bigger the outperformance by foreign stocks versus U.S. equities.

One route to investing in foreign stocks, Fidelity says, is to own stocks from other developed countries (England, Germany, Japan, etc). Those stocks are typically less volatile than companies based in emerging market stocks.

Emerging market countries also try to control their currencies, rather than letting them float freely, so investors won’t get the maximum affect if the dollar continues its decline.

Fidelity points out one caveat to investing abroad: over the last decade U.S. stocks beat foreign stocks three out of four times in years when the dollar strengthened.

Who’s Talking: William Truscott, Chief Investment Officer, Ameriprise Financial

The Gist: Expected slower growth and a weaker dollar make international stocks, U.S. large company stocks and corporate bonds wise plays.

Looking beyond the economic crisis, Truscott thinks the most likely scenario in the months ahead doesn’t augur well for the dollar’s value. The United States, like other countries that have endured financial crises, will experience weak economic growth of 2% to 2.5% in 2010. Unemployment will remain high, though it will “fall from its peak,” says Truscott, which means consumers won’t spend as much and the savings rate will continue rising. Meanwhile, housing prices will no longer appreciate “at a rate that supplies consumers with additional income for spending,” and the returns on bonds will remain competitive with stocks after adjusting for risk. All these conditions point to a continued weak dollar and low interest rates by the Federal Reserve, which make international stocks more appealing.

Under such a scenario, Truscott predicts that stock and bond markets will offer returns in the mid to low single digits. Investors will rely on bonds and stock dividends for a significant portion of their portfolio returns. The best bets, Truscott says, are International stocks and U.S. large company stocks, and should make up 25% and 20% of a portfolio, respectively. Investment-grade corporate bonds are also an important part of investor portfolios in times like these (20% of a portfolio, he suggests).