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. Last Updated: 07/27/2016

Global Stock Market Outpaces Dow in '96

Like smaller U.S. stocks, most foreign markets lagged U.S. blue chips in 1995. This year is a vastly different story.


Measured in their native currencies, most major foreign stock markets are far outpacing the Dow since Jan. 1. Brazil's key index is up 25.9 percent, Hong Kong's 13.9 percent, Germany's 8.8 percent and Japan's 5.2 percent.


As in the U.S. market, falling short-term interest rates have bolstered big-name stocks worldwide, as investors bet that easier credit from world central banks will keep the global economy growing.


But the main appeal of foreign stocks is that many of them have been dead money since 1993. Wall Street is pushing the idea that there is terrific value overseas.


Merrill Lynch & Co., for example, predicts Hong Kong's economy will grow at 5 percent or faster this year and Singapore's at 7 percent or better. Yet their stocks are, on average, priced the same or cheaper than U.S. shares relative to estimated 1996 earnings.


"They've got very attractive growth rates that we don't expect to see in Europe or the U.S.," says Douglas Cliggott, global stock strategy manager at Merrill.


Of course, the risks in foreign issues are huge -- in 1994 many markets collapsed as interest rates rose.


Shifting currency values also can be a big risk. So far this year the dollar has been rising, trimming Americans' gains in some markets. The Japanese market's 5.2 percent rise, for example, is a 2.4 percent rise for U.S. investors.


Even so, barring a global recession, many big investors believe that foreign markets have momentum on their side now. "If we are correct in our favorable U.S. market view, it is quite likely that U.S.-based investors will become increasingly comfortable buying non-U.S. securities in 1996," predicts Goldman Sachs strategist Abby Cohen.


Meanwhile, blue-chip U.S. stocks are off to a great start in 1996 after a spectacular 1995. But smaller U.S. stocks are struggling, which is troubling because their fortunes are closely tied to the domestic economy's.


More disturbing, the price of gold is up nearly 7 percent this year, suggesting that higher inflation looms on the horizon.


At the same time, the U.S. bond market has developed a split personality: Shorter-term yields are at 17-month lows, but long-term yields have begun to surge, taking a cue in part from gold.


No wonder Prudential Securities strategist Greg Smith in New York recently advised that "a reasonably good strategy to deal with 1996 is for investors to stay very flexible in their thinking."