Money: Opportunity knocks with foreign stocks

New Zealanders appear to have got the message that it is sensible to include overseas investments in their portfolio. The Reserve Bank says money invested here in managed funds increased from $27.4 billion to $28.2 billion in the 12 months to June 30. Over the same period, the amount invested in overseas funds increased from $13.8 billion to $17.1 billion.

Market share figures from research house IPAC Securities show the same trend: more money is going into international share funds.

The NZ economy makes up less than one half of 1 per cent of the global economy, so being fully invested here carries high risks. Also, there are few opportunities to invest in high growth areas such as biotechnology and information technology, the resource sector or companies such as banks.

Statistics show that putting money overseas increases overall returns and lowers the risk factor and the volatility, or sharp price movements, in a portfolio.

The other trend becoming evident is the use of sector themes by investors and professional fund managers, highlighted by the underperformance of Telecom. It's not Telecom that investors dislike, it's telco companies that are out of favour globally.

The traditional approach is to decide which country to invest in, then which sector, then which company.

Now, with companies becoming more global in their approach, investors are paying more attention to sectors and individual companies.

This change from "top down" to "bottom up" means that for the moment stock selection rules.

The dilemma facing New Zealanders is what to do now the kiwi dollar has fallen more than 14 per cent in the past year.

Those with overseas investments have had big currency gains in their portfolios - gains so big that terrible markets can look good.

Take Japan, for instance. In the past year the Nikkei index has fallen 5 per cent but because the yen has held up well against other currencies and has appreciated 18 per cent against the kiwi, investors get a 13 per cent gain for not much work.

The recent past looks quite good, but now the picture's not so rosy. If you are thinking of sending your kiwis on OE it can be a gut-wrenching experience.

Assuming the kiwi will gain a bit of altitude in the next year, then any of the local dollars sent overseas are going to have to work doubly hard to get ahead.

The question becomes one of what to do now.

Diversified Investment Strategies director Norman Stacey is definite in his answer, but more cautious in its execution.

"Yes," he says. "I would keep going offshore. I wouldn't change my long-term strategy."

But investors needs to be a little more tactical in their approach to overseas investing. "Long term, I would keep putting money into the United States," he says. "But not now."

These decisions are all to do with how the kiwi has fared against other currencies. While it is down against the US, the yen and the Australian dollar, it has stayed on par with the euro.

As one commentator pointed out this week the euro, on a trade-weighted basis, has been harder hit than the New Zealand dollar whereas the two have stayed relatively level one for one. It's time to be a bit Eurocentric, especially if you consider the positive prospects (if you forget about petrol protests) for Euroland.

Many commentators and fund managers predict strong gains on the Continent through continuing merger and acquisition activity as Europe becomes far more integrated.

Another view , this time from New York-based fund manager Sandra Yeager, is that while the US is expensive, it offers the best growth prospects.

She still favours the technology sector, despite the huge fall in dotcom share prices.

Ms Yeager, a senior vice-president and portfolio manager with Alliance Capital, has been in New Zealand this week doing presentations for AXA. She says the outlook for the US market is reasonably positive and forecasts a soft landing for the economy as growth gradually slows.

"I think we are near the peak with monetary policy tightening," she says.

That means further interest rate rises by the Federal Reserve are unlikely.

She says her portfolio, which beat the Morgan Stanley international index in the past year, is overweight in technology stocks (about 33 per cent of its assets, against the benchmark of 22 per cent).

Rather than take a sector approach, the portfolio managers have tried to pick the best growth stocks, tipping the balance in favour of companies such as Intel (US), Cisco (US) and Canon (Japan).

She says that while tech is favoured, she is not big on telecom stocks.

The other sector in favour with Alliance is finance companies, something she says is unusual for a growth manager. But some companies look set to sustain growth rates of 20 per cent.

Alliance's favourite stocks in this area include Citigroup (US), Morgan Stanley (US) and BNP (Fr). (Alliance is not allowed to invest in its parent company, AXA.)

While Mr Stacey says people should continue investing overseas, despite the low dollar, he also points out that investing in New Zealand shares is a good defensive investment strategy.

The ideal mix is to find New Zealand companies that have the bulk of their costs in local currency and earn income from overseas.

"New Zealand companies with foreign earnings are definitely attractive," he says.

Companies like this are also attractive to foreign investors, which explains the interest in Montana and the Fletcher stocks, and why Shell is interested in Fletcher Energy. There is, says Mr Stacey, a high chance that more local businesses will fall into foreign hands.

Investors should relish the chance to buy companies likely to be taken out by foreigners because the price paid for the assets will be attractive.

As Ms Yeager says, the name of the game is identifying the right companies in 2001 and investing in them early.

*Philip Macalister is the editor of online money management magazine Good Returns, www.goodreturns.co.nz, which provides news on managed funds, mortgages, superannuation, insurance and financial planning.