Is U.S. the New Japan? Then Invest Abroad

It's crucial to own countries that are on different economic cycles than the U.S. because stock markets tend to follow economies. Commodity-based economies are a good place to look for this attribute. In the past three months, the S&P 500 of the U.S. is down 10%. Chile, which only sends 15% of its exports to the U.S., is up 7%. Brazil, which sells a lot of its resources in emerging Asia, has risen 14%. And Norway, whose prospects are obviously tied to whatever oil does, has climbed 4%. Any of those moves could turn out to be a sucker's rally. But if their declines were cyclical events, the timeline for a rebound (six to eight months from their respective peaks) is plausible.

A theme I have written about frequently is the building up and out of things like ports, highways and electrical grids in ascending countries such as China. The pace of the build-out will ebb and flow and obviously is subject to cyclicality. But both the Shanghai Composite and the Hang Seng Enterprises Index (commonly referred to as H shares) have advanced 20% and 10%, respectively, in the past three months. Australia stands to benefit from this China effect, as it sells a lot of resources in that country. Though the Australian equity market has been crushed, Chinalco, a Chinese aluminum company, is buying a large stake in Rio Tinto(RTP), and Minmetals announced a takeover of Oz Minerals. China is buying Australian companies.

If this line of thinking makes any sense, you will need to do more research than usual. Broad-based international funds are often heavy in Japan and Western Europe, which I think are places to avoid. This means investing in country funds and individual stocks.

These are not end times, but I do believe U.S.-based investors will have a better chance of getting "normal" equity market returns from other countries.

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