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Strong International Plays to Continue in 06

NEW YORK - Globalization will continue to offer opportunities for investors, fund managers and American multinational corporations next year, according to a panel of money managers who offered their outlook for 2006 at a Millennium Media Consulting press briefing last week.

Panelists pushed investors to look beyond traditional large-cap funds comprised of old American blue-chips to international and global funds.

"We have to look at the world economy and how the U.S. fits into it," said Roger Ibbotson, chairman of Chicago-based asset allocation education and consulting firm Ibbotson Associates.

No longer can companies count on American consumers to drive their profits. Debt-saddled as individuals and as a nation, with a trade deficit close to 6% of the gross domestic product (GDP), companies and investors that will yield the strongest returns in the coming year are those looking elsewhere for growth. That means turning to emerging markets such as China and India, recovering economies such as Japan, and the countries rich in resources that help support their growth, such as Brazil or even Russia.

"The world is benefiting from globalization," said Ronald W. Holt, Jr., president and managing director of Hansberger Global Investors. While the S&P 500 index will likely offer investors a 3% return in 2006, international markets will continue to yield double-digit growth, the Fort Lauderdale, Fla.-based fund manager said. Not only do overseas companies have great growth potential, but many are well managed, fulfill real demands and typically cost 30% less than American stocks, he said.

While China and India seem to have captured the attention of most American investors, Brazilian and Mexican markets are up 60%. Even established foreign markets that may yield only 14% return on equity (ROE), compared to the American average of 18%, are worth considering, according to Holt, since they still generally cost 15% less.

Russia is risky, because investors face a lack of disclosure and a volatile domestic situation, but gains can be great, according to Holt. "Russia has been one of the best-performing markets since 1998," Holt said. Year-to-date, it's up 66% from 2004, he added. Russia is rich in natural resources - things like oil and coal, iron ore and nickel - that fast-growing economies and established ones alike depend on daily. China, like the United States, only produces about one-third of the energy it consumes, Ibbotson pointed out.

Japan, reeling from its decade-and-a-half-long recession, offers opportunities, too. Japanese companies have restructured their management, responded to new regulations and beefed-up their balance sheets. Many are ready to invest in new equipment and appear poised for growth, Holt said. Already, the Nikkei exchange is double its rock-bottom 2002 value of 7,600 points.

Offshore investing aside, speakers said they are also interested in American corporations doing some investing in foreign markets of their own.

"At the center of the U.S. economy is the American consumer, making up 70% of the gross domestic product," said Axel Merk, of the Merk Hard Currency Fund in Los Altos, Calif. But the average American carries more consumer debt than ever before and therefore has reason to fear fluctuating interest rates. And that fear translates into Americans becoming not only unwilling, but unable to pay more for products.

Besides expanding their markets, companies must also look abroad to offset increased costs, such as labor, Merk added.

Enter China. With a population of 1.3 billion, Chinese consumers wield considerable global power. And while the country's population is comparatively poor, if even only one-third of the population participates in the global consumer culture, it would mean more consumers added to the world market than by the United States, Holt said.

Right now, China also owns about $100 billion worth of the United States' national debt, Ibbotson said. As significant as that investment is to the U.S., it is an even greater portion of the Chinese GDP, underscoring strong interdependence between the two nations, Ibbotson said.

But not all the speakers were so bullish on international and global plays. Buying funds filled with U.S. stocks - even large-caps - holds some promise in 2006, as long as investors choose wisely, said James McGlynn of Summit Everest Funds. His Cincinnati-based firm focuses on sub-sectors poised to grow. The transportation sector, for example, offers growth despite the effects of $60-a-barrel oil on fuel. While air freighters and trucking companies flail, railroad companies have fared well, McGlynn said.

Although certain durable goods can be produced less expensively outside of the United States, there are arenas in which American companies still dominate the market. The rest of the world still imports movies, entertainment and computer software, for example, McGlynn said.