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. Last Updated: 07/27/2016

U.S. Bullish on Foreign Markets

NEW YORK -- The slick slide presentation told stockbrokers the benefits of a country that has racial tensions and a president whose health problems have caused its currency to plunge.

But the man touting South Africa's stock market isn't South African or even working for that country. He, like the 100 brokers whom he was addressing, works for Merrill Lynch, the largest U.S. securities company.

"We think South Africa is broadly misunderstood," said the presenter, Doug Johnson, a market fund analyst who was praising other foreign markets as well.

"Political volatility can create a superb buying opportunity" if the stock market is fundamentally sound, he said.

With U.S. stock markets at lofty levels but showing some signs of slowing down, brokers are looking for new places to invest. Many recommend investing abroad, and investors seem to be hearing the call -- despite some important risks.

According to the Securities Industry Association, Americans bought $21.6 billion in foreign equities in the third quarter of last year, the most recent quarter for which figures are available.

And mutual funds, which individuals use most to make investments overseas, poured $9.5 billion into foreign stocks the first two months of this year, already more than a third of the record $27.2 billion invested in all of 1994.

The number of mutual funds that invest primarily in foreign equities has grown from 95 in 1990 to 380, according to the Investment Company Institute, a mutual fund trade group.

"Let's think back 10 years. Would it have occurred to us that there were investment opportunities in India?" asked John Collins, a spokesman for the group. "But now there's more information about foreign markets."

The largest amount of foreign stock purchases from the United States recently has been in Japan, now around its four-year high.

Americans have also bought large numbers of stocks in newer markets, especially in Hong Kong, South Korea and other emerging Asian nations, according to the Securities Industry Association.

But, while newer markets can have the highest returns, they can also swing wildly amid political uncertainties.

"People want to go into the emerging markets, because they think that that's where the most growth is, but they can expose themselves to too much risk by doing so," said Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania.

Someone who, with dollars, bought into the Mexican stock market on Dec. 1, 1994 and has never sold any holdings would still be down 46 percent, although Mexico is recovering from the economic collapse that occurred that month.

South Africa's main stock market index has shot up and down and back up this year as its currency dropped to record lows against the dollar, fueled by rumors over President Nelson Mandela's health and later by the National Party's planned withdrawal from the coalition government.

Investing in Europe or Japan isn't a difficult decision, "but investing in emerging markets is a little less clear," said Kenneth Rogoff, a Princeton University professor of economics and international affairs.

"A country can change governments, decide not to repatriate profits for 15 years," he said. "I think it would be safe to say that the Russian stock market has huge potential and huge risks. Who knows what's going to happen there?"

Cross-border investors also have to contend with currency swings, which can multiply gains many times -- or turn them into losses.

New Zealand's stock market, for example, went up 3.51 percent through March this year in local currency, but someone who converted from dollars then changed the money back would have lost 0.7 percent.

Advisers nonetheless recommend putting money in many international markets, using them as a place to hedge against market declines at home. They say market and currency fluctuations even out in the long run.

Merrill Lynch advisers recommend that, for the highest return with the lowest risk, 18 percent of an average portfolio be in foreign stocks -- much more than the actual amount of U.S. investments now overseas.

About 4 percent of U.S. stock investments are overseas, up from 1.7 percent 10 years ago.

New York-based investment company BEA Associates, which manages $27 billion in funds, says emerging markets, while risky, have in total averaged better returns than the developed ones.

"It's always a question of price and performance versus 'buyer beware,'" said BEA international investment strategist Bill Sterling, noting that information isn't as easy to get in some of the newest markets.

"It's going to be a while before all countries have accounting standards and reporting standards that are as rigorous as those of the United States," Sterling said