Is It Time To Buy Euro Funds

March 14, 2005
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GRAND RAPIDS — The sky may not be falling, but the dollar is.

And some economists believe the dollar will drop another 20 percent before it stabilizes against foreign currency. They say the record trade deficit, blooming budget deficit, and a continued consumer demand for high-priced crude is making the fall necessary.

Goldman Sachs International Chairman Robert Hormats recently told the New York Times that nearly 80 percent of the world's total savings last year was used to finance this nation's consumption. Hormats added that foreigners own 43 percent of all U.S. Treasury bills, notes and bonds.

So what is an investor to do? Well, if he or she feels the value of the dollar will continue to fall, and then international funds might be a good buy — especially those that feature securities from European companies.

"When our dollar goes down, it goes down in relation to the Euro. An investor would gain from appreciation. They wouldn't be betting on the economy of Europe," said Eric Ericksen, an investment counselor at 1345 Monroe Ave. NW.

"That's why the international funds did pretty well last year. The gains were all currency related. The idea is if someone thinks the dollar is going to go down, they should buy foreign funds, primarily European funds."

The European market gained 17.8 percent in U.S. dollars in 2004 and 9.4 percent in their own currencies. The top developing market in Europe last year was Austria, which was up 69 percent in U.S. currency. The average international large-cap fund rose 15.8 percent in American dollars last year — twice the return for similar funds that invested only in U.S. firms.

But Ericksen made it clear that he wasn't advising anyone to buy international funds, as he didn't agree with the economists who claim the dollar will shrink by another 20 percent.

"I would like to see those economists put their money in that first," he said.

Ericksen, who has taught personal finance locally and held retirement seminars for some of the area's largest companies, said he doesn't spend a lot of time worrying about the dollar because the quality of a nation's economy is directly reflected in a country's currency.

"The better the economy — which means the more efficient it is, the more productive it is, the more it's growing — is what gives you the value of the dollar. Everything else is just a short-term speculation and adjustment," he said.

Ericksen said foreign banks have invested in U.S. debt because of the nation's economy.

"The dollar really is just sort of back into parity against the Euro and we're kind of in the middle of the trading range. I would never buy an international fund, period. But I wouldn't buy it on the hope that the dollar would fall further, because we've got the best economy."

With record prices being charged for a barrel of crude and a conservation effort nowhere in sight, should someone invest in American oil and gas companies if they're looking for a domestic buy?

Ericksen didn't think so.

Despite the slick oil prices and volume gains some firms have made, he didn't think buying those securities was a particularly smart thing to do.

"The fact that they are so popular probably means that they're a bad buy," he said.

"My rule of thumb is anytime you see something on CNBC or in the money magazines, it's too late. That's a sell signal, not a buy signal."

Ericksen said he couldn't find a bargain in oil and gas stocks — as none are cheap enough to provide a big return — or in any other securities, for that matter.

And he isn't comfortable betting on which direction a commodity will go. Nor is he at ease with buying a theme, like oil, international or currency. He feels that any future growth a company or industry might have is already included in its current stock price.

Take Wal-Mart, for instance. The world's largest retailer increases its sales revenue year after year, but its stock price hasn't climbed in tandem with sales to reflect that growth.

"All that good news we've thought about is already in the prices," he said.

Ericksen advocates a balanced portfolio, one with a mix of stocks and bonds. But he didn't name any funds or favor one index over another, as he doesn't see a lot of steady upward movement in securities for the next two years. In fact, he expects a "ho-hum" market, one that will rise 8 percent and then drop 8 percent over the short term.

Why? Because the nation is getting older. And as boomers have aged, their thoughts have started to turn from buying things to socking away money for retirement.

"When savings go up and consumption slows, the stock market gets flatter. Wal-Mart's stock has gone nowhere in five years and retail is struggling because consumption patterns are changing," he said.

"If you look at the entire stock market, all the good news about low inflation, stable interest rates and decent growth is already in there. As everybody knows, a good thing is a good thing, but there are no bargains."

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