Stanasolovich thinks that domestic equities will provide only "low single-digit returns over the next decade on a pre-tax basis," while better opportunities await beyond U.S. borders. "Large international equities may add a percent or two (above domestic returns)," he says. "Small cap should add a couple of percentage points above that, and emerging market equities might add another couple of percent. So emerging markets might go to 8% returns while U.S. stocks might only do 2%. The fundamentals in the emerging market equities are better."
But Stanasolovich maintains a cautious approach to emerging markets, avoiding a focus on any specific region. So too does Moffett, the UMB Scout WorldWide Fund manager, who says he focuses largely on investments in "Europe, the Americas and Canada, and some in Asia."
"We start with the countries," Moffett says. "We're basically the
developed economies, with what we think are stable governments. We're
not deep into Russia and China, for example. ... We don't have anything
in Africa and the Middle East-they're too hairy for us."
Rytoft's focus, of course, is on Europe. "Europe is
a more conformed group," he says. "All of the countries are moving in
the same direction." He says that he expects Eastern Europe will
continue to grow and "get to 80% to 90% of the level of the rest of
Europe."
He says that, ranking according to risk, he puts Europe first, then Latin America followed by Asia. "If you take general P/E levels, the U.S. is 17 roughly; Europe is at the 14 to 15 level, and Eastern Europe is at the 11 to 12 level. That's the rough breakdown."
Krosby, too, feels that Europe is harboring a great deal of potential, which is largely being ignored by investors in the United States. "You had a situation where investors started to shun continental Europe, for the lack of capitalist spirit, if you will," she says. "As a result, I that think the valuations are becoming attractive. We're also starting to see governments dealing with these issues, and from the bottom-up aspect the companies are addressing this too."
Without realizing it, Krosby says, we may be witnessing the beginning of the end of the social welfare compact that has dominated Europe since World War II. "They understand that they have to be competitive globally and domestically," she says. "You really are beginning to see a change in tone. Moreover, we saw companies in Europe, at the beginning of the downturn, announce restructuring, announce layoffs, and even though there was a political backlash the companies in fact went ahead with the restructuring and actually laid off people, in environments I never thought we could see."
Krosby notes that European governments have been involved in ongoing
debates over lengthening their short work weeks, one pillar in Europe's
costly social system. "Even the top-line macro news coming out of
Europe is incrementally changing. In essence, you are beginning to see
the dismantling of the social contract with workers that allowed them
the huge, huge benefits," she says.