Foreign markets make U.S. stocks look good

By Matt Krantz, USA TODAY

Investors who bailed out of U.S. stocks this year may be starting to feel homesick.

The U.S. stock market hasn't been much to write home about, with the Standard & Poor's 500 coming off a rough two weeks that left it down 7.9% for 2011. But that beats the pounding investors who strayed outside the U.S. have gotten.

Abysmal performances by some key overseas markets have caught some investors, who thought spreading their money around the world would reduce risk, off guard.

"There's this idea that (foreign investing) is the safety cushion for American investors," says Ken Winans of Winans International. "But the numbers just don't add up."

Signs of the poor performance:

•International stocks as a whole are lagging. The MSCI World Index, which tracks 24 developed nations ranging from Germany to Japan, is down 14.8% this year, outpacing the S&P 500's loss, says S&P Capital IQ,.

•The world's worst markets are off sharply. While foreign stocks as a whole have been disappointing, some foreign markets are getting downright creamed. Greece, Egypt and Austria are the worst markets, down 64%, 45% and 43%, respectively, says S&P Capital IQ.

•Even fast-growing "emerging" markets are suffering. For years, analysts breathlessly extolled the fast-growing economies of Brazil, Russia, India and China. But these "BRIC" nations have all been very disappointing this year. Despite being a favorite coming out of the U.S. recession, China's market, measured by the iShares FTSE China 25 exchange traded fund, is down 23%. The iShares MSCI BRIC ETF, which tracks all four nations, is down 29%.

Europe is at the epicenter of the disappointing year for international stocks. A poisonous combination of too much debt and too little political decision making have proved to be disastrous for investors in the region, says Nathan Rowader, director of investments at Forward Management.

Worries about high levels of government debt are also spilling over to other nations and their stock markets, even though politicians have been able to avoid a meltdown so far, says Sean Casterline, president of Delta Capital Management.

But investors shouldn't just blame Greece and Europe, Winans says. Since December 2009, all but one of 14 major stock markets abroad have lagged behind the S&P 500, he says. The exception: Mexico.

Investors shouldn't necessarily turn their backs on international stocks. Patient investors who can wait years for a return can take advantage of the lower valuations, Forward's Rowader says.

But investors' recent overseas mishaps just show that, despite its problems, the U.S. is still the top market. "We've realized America is still the driver of the world's markets. When you go outside the U.S., there's more risk," Casterline says.