If you had any money riding on overseas stock markets, chances are youve taken
some pretty nasty lumps this year. Through mid-December, the broadest measure of
developed foreign markets the MSCI Europe, Australasia and Far East Index has
lost 17.8% in dollar terms (excluding dividends). The emerging bourses,
according to MSCI, have fared even worse, skidding 21.5%. Painful indeed,
especially when you consider that the headline U.S. stock indices are at either
slightly above (Dow Jones industrials) or slightly below (S&P 500) the breakeven
line. So the question arises: Does it still make sense to diversify
internationally? Tempting as it is to be cynical about a financial world that
often seems broken, I dont think weve seen the end of great profit-making
opportunities in foreign markets. In fact, the recent weakness in overseas
stocks probably is setting us up for exceptional returns once the current
distress passes. The main reason, of course, is valuation. As of Dec. 14,
according to Bloomberg , the stocks comprising the Stoxx Europe 600 Index were
quoted at a slender 10.1 times estimated 2011 earnings, versus 12.2 times for
the Standard & Poors 500 Index a discount of 17%. The MSCI Asia Pacific Index,
which normally trades at a sizable premium to the S&P because of Asias superior
economic growth, was at 12.6 times estimated 2011 earnings. Some emerging
markets are even cheaper. Brazil, for instance, is selling for about eight times
trailing 12 months earnings, and India about 12 times both well below their
norms for the past five years. Remember too, that, despite a recent slowdown,
these countries still are growing much faster than the developed economies of
North America or Europe. For the opening months of 2012, Im taking a cautious
view of most foreign stock markets. Europes sovereign-debt travails will weigh
on economic activity around the world, but especially in the EU homeland. In
addition, were picking up early signs that Chinas credit-fueled boom might be
due for a setback in 2012. Chinese purchasing managers report that the countrys
manufacturing sector is now contracting at the steepest rate since early 2009.
Look to Switzerland, Australia for Powerful Long-Term Growth When the global
economy eventually finds its footing, these bourses will snap back a long way
fast. Accordingly, I recommend that you proceed slowly and judiciously with new
commitments. In Europe, I advise you to favor recession-resistant health care
and consumer-staples names, such as drug maker Novartis (NYSE: NVS ) and food
processor Nestle (PINK: NSRGY ). Not so coincidentally, both companies are based
in Switzerland, with its friendly business climate and sound currency. Both
stocks also throw off generous dividend yields: 4.2% for NVS, and 3.7% for
NSRGY. Dividends typically are paid once a year, in April. Switzerland extracts
a 15% withholding tax on dividends remitted to U.S. shareholders, but you can
obtain a credit against this tax if you hold the stock in a taxable account (not
an IRA). What to do now: Buy NVS at $58 or less, and NSRGY at $56 or less. Among
the other developed markets, my top choice is Australia. Australian tax law
encourages corporations to pay out the lions share of their profits in the form
of dividends. As a result, most Australian stocks yield considerably more than
their U.S. counterparts. Take Westpac Banking Corp. (NYSE: WBK ). Strong and
conservatively managed, this Aussie bank has boosted its dividend more than
400%, in dollar terms, during the past 10 years. Current yield: a mouth-watering
7.8%. Dividends are paid semiannually, in July and December. No withholding tax
currently imposed on U.S. residents. For a diversified portfolio of Australian
stocks, consider iShares MSCI Australia Index Fund (NYSE: EWA ). This
exchange-traded fund owns a large slug of financials (44% of the portfolio), but
also gives you exposure to Australias natural-resources sector. Current yield:
5.1%. What to do now: Buy WBK at $110 or less, and EWA at $23.50 or less.
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