China's economy expanded 8.7 percent in 2009 as massive fiscal stimulus and bank lending helped the country escape recession despite weaker global trade. "The flip side of strong growth is liquidity removal and tightening. The risk for 2010 is how to remove the risk of liquidity," said Alexander Young, international equity strategist at S&P Equity Research Services. Last month, China raised banks' reserve-requirement ratio, and also reportedly cracked down on new lending, rattling markets worldwide. Young said there are expectations China will begin to raise interest rates before the end of the first quarter. According to MSCI/Barra, China stocks rose 59 percent over 12 months, but are down 7.1 percent year-to-date. And among U.S.-listed China shares, according to Morningstar, CNOOC is down 4.1 percent on the heels of a 68 percent rise in 2009. Young said China remains a great longer-term opportunity. "Near term," he said, "it's clearly not doing well."
According to MSCI/Barra, Brazil is up 74 percent on a one-year basis, but down 14 percent so far this year. Morningstar's Nichols said the country is facing headwinds such as skyrocketing stock valuations and uncertainty about the outcome of the presidential election expected in October. "If you're running a big portfolio, you can't afford to not have some money in Brazil, but for the average investor that can go anywhere, Brazil is not where I'd be right now," he said. "Historically, with changes in the government there, the currency has taken a hit," Nichols added.
Event risk in the U.K. financials sector has Guy Monson, London-based chief investment officer and managing partner at Sarasin & Partners, keeping those stocks at arm's length. "There is a risk that highly indebted companies in economically sensitive sectors (such as banks and real estate) could struggle to refinance large levels of maturing debt over the coming years," he said, adding, "until the U.K. saver rebuilds savings for a persistent period, this problem will remain."
Worries about the ability of Greece to repay debt spread last week to Portugal, Spain and other struggling members of the European Union, including Ireland and Italy. Spain's IBEX 35 is down 15 percent year-to-date, while Greece's ASE Composite has tumbled 14 percent. Some observers are concerned the situation could unfold into a broad and sharp selloff across even relatively healthier European markets. And while investors may not hold Greek or Portuguese stocks, Spanish banks such as Santander and BBVA that have come under pressure recently are widely held in international portfolios. Strategists caution investors to consider where the companies they invest in are doing business. "When you're looking at sovereign debt and fiscal deficits, many of these countries will grapple with it for many years," ING's Jansen said.
Consumer discretionary — U.S., Japan, Europe
In developed markets, retail, luxury and other consumer discretionary stocks had a decent bounce last year, Jansen said. But the path forward may be rocky. "Retailers that are tied to these domestic developed economies have a long, long struggle ahead of them," he said. "There's too much capacity to the extent consumption is not going to come back significantly. There will be a huge amount of price competition." Retailers that could face tough times, he said, include Marks & Spencer, and luxury goods and appliance makers tied to developing economies. Jansen said the consumer discretionary sector expanded so massively in the past decade that it's going to take a couple of years to consolidate, at least.
MADRID — International investing looked so easy last year, but now strategists say there are clear risks even in some of those "can't-go-wrong" markets. International markets as a whole are in the red about six weeks into 2010, with the MSCI/Barra EAFE (Europe, Australasia and Far East) index down 5.8 percent, after gaining 31 percent over the previous 12 months. There are some old worries — whether economic growth can be sustained — and some new ones — whether some nations will be able to repay their debt — that international investors face this year. "The top-down macro environment and the impact of how you view bottom-up opportunities is more important than it has been in decades," said Martin Jansen, New York-based senior portfolio manager at ING Investment Management. One reason why international money managers have soured on a few areas is due to high valuations and big gains. Eastern Europe, for example, saw its markets soar 120 percent over 12 months. This year so far, the region is down 0.8 percent while Russia is off 6.3 percent. "A lot of Eastern Europe has seen big rebounds in currencies and the markets have come back. Valuations are just not there anymore," said Allan Nichols, an international equity analyst at investment researcher Morningstar Inc. Here are five global spots that are red flags for money managers now: