A weak U.S. dollar, strong performance prompt renewed interest.

Could international stocks be ready to outperform U.S. stocks for the first extended period since the 1980s?

David Warren, co-manager of the T. Rowe Price Interna-tional Fund, thinks so. Equity valuations abroad are not quite as attractive as they were a year ago, he observes, but they still favor non-U.S. companies.

"Most economies look as though they are in a growth phase," he says. "There is increasing likelihood of a synchronized global recovery that is more pervasive than we have seen in a long time."

The key driver of overseas equity performance will be the strength of the earnings recovery, how soon interest rates begin to rise and continued modest weakness of the dollar, Warren believes. The economic expansion in the United States should provide a tailwind, particularly in Europe. "The weakening dollar has played a major role in the outperfomance of non-U.S. equities over the past 24 months," he says. "That trend should continue, given the U.S.'s huge current account deficit and less U.S. investment by foreign investors."

George Greig, manager of the William Blair International Growth Fund, agrees. He likes Asia, which makes up 20% of his fund's holdings. "Asia performed well last year and will surprise on the upside this year and outperform the rest of the world," Greig says. "The region's economy is balanced. Balance sheets are solid, and currencies are well supported." Greig adds that Europe will benefit from global economic expansion, but will suffer from lagging profit growth and structural problems within the European Economic Union.

Investing worldwide can be risky. There is a lack of liquidity in emerging markets. There is geopolitical risk due to the threat of terrorism. In Asia, the problems with North Korea, unstable governments and banking systems could cause trouble. In addition, the international markets are highly correlated with the United States, so the fortunes of the overseas markets could rise and fall with the United States.

Historically, most periods of international outperformance coincide with a weaker U.S. currency, says Tom Sowanick, global strategist with Merrill Lynch in New York. However, the emerging markets of Indonesia, Thailand, Chile, South Africa, Russia, Hungary and the Czech Republic have outperformed when the dollar is weak. By contrast, Korea, Taiwan, Mexico and Israel have outperformed when the dollar is strong.

The Asian markets registered stellar returns in both local currencies and U.S. dollars, averaging more than 56% last year in local currencies and 57% in U.S. dollars. But Mark Headley, manager of the Matthews Asia Pacific Fund, looks for stock prices to pull back.

"The biggest risk is that we have had a fabulous market run and need some bad news to test things," he says. "We are also going to face political tensions all over Asia. Taiwan, Indonesia and North Korea could flare up at any moment. In Japan, the question is if the country is recovering on a structural basis. Or is it a cycle bounce followed by another recession?"

Asia also is heavily influenced by the U.S. economy. One of the greatest threats: If the U.S. economy slips and consumption declines. Furthermore, rising U.S. interest rates could have a negative effect on the region.

On the plus side, Headley says economic growth is broad-based. Foreign capital is flowing into the region and corporate earnings look positive. But in China, stock prices and the economy are overextended, he says. "The great theme in Asia remains the regional integration of the Asian economies, which has been building for many years," he continues. "This makes the region highly competitive versus North America and Europe."

One-third of the Matthews Asia Pacific fund's assets are in Japan, which has been the sick man of Asia for the last decade. Headley says Japanese stocks are undervalued. The Japanese government and corporations have been making adjustments. Japan is benefiting from the economic growth in China.

The fund invests 15% of its assets in Hong Kong, 11% in China and 30% in Korea. The rest is well-diversified throughout the region. The largest sectors are financials, information technology, telecommunications and consumer companies. Among the fund's largest holdings: Honda Motor, Kookmin Bank, Giordano International, AXA Asia Pacific, SK Telecom and Swire Pacific.

Greig of William Blair International also looks for solid returns from his Japanese stocks, which he bought at reasonable prices. Japan makes up almost 25% of his fund's holdings. "The growth outlook in Japan will continue to benefit from higher corporate cash flows and strong Asian markets, while the make-or-break factor could be consumer and business confidence," he says. His largest Japanese holdings are Sumitomo Trust, Nitto Denko Corp., Keyence Corp. and Seiko Epson Corp.

When it comes to China, Romeo Dator, manager of the U.S. Global China Region Opportunity fund, is concerned about a mushrooming bubble in that market. Last year, his fund gained 81%. "Hot money has been moving into this sector," he says. "The overheated economy and stock markets are at bubble levels. Manufacturing has been strong. But you will get to a point where supply outstrips demand and the economy will slow."

Dator says financial advisors must be long-term investors. China is taking steps to open its economy. It is now part of the World Trade Organization. There is a lot of investment capital flowing into the country. But there are structural bottlenecks. The government is building the country's infrastructure dramatically. Torrid lending practices could hurt the banking system. Plus, corporate financial reporting is not as good as it is with United States and European companies.

"The government is trying to slow the pace of lending and increase the level of reserves in banks," he says. "There are definitely some bad loans on the mainland's bank books. The government is injecting $45 billion into two state-owned banks and is taking steps to improve the situation."

There also are nascent labor issues in China. Workers are organizing. They want high wages and better benefits. Most of Dator's investments are in Hong Kong. He usually avoids mainland China due to the lack of liquidity. Sectors he favors are basic materials and commodity companies. Aluminum Corp. of China and Jiangix, a copper, energy and petrochemical company, are growing earnings in excess of 20% annually. Dator has also increased his exposure to property stocks. The Henderson Land Development Co. is building properties in mainland China. Earnings are growing at 17% annually. He owns Capital Alliance, which is building schools in mainland China.

Expectations for Latin American and European stocks are noticeably less optimistic than Asian stocks. On the European side, fund managers must buy undervalued companies based on future earnings. Euro area stocks gained just 22% in euros, while growing 46% in U.S. dollars last year.

Thomas Tibbles, manager of the Forward Hansberger International Fund, believes European economic growth will lag the rest of the world. His forecast calls for less than 3% growth for the near future. Nevertheless, he says there are a lot of attractive, undervalued companies with strong franchises and fast earnings growth compared with their peers. The fund's average holding trades at only 2.5 times book value. But future earnings are growing at 14% annually. Half the fund's assets are invested in the United Kingdom and Europe.

Tibbles favors European telecommunications and media companies. Top holdings include Esprit, Siemens, Vodafone Group, Total Fina Elf and Societe Generale.

International fund managers are keeping a small portion of their portfolios in Latin America and other emerging markets. Tibbles has limited exposure to the emerging markets. In Latin America, he sticks with large blue chip companies with market capitalizations of $1 billion or more, such as Coke.

"We have passed through the easy part of the cycle for Latin America and emerging market stocks," Tibbles says. "When U.S. interest rates rise later in the economic cycle, emerging markets will find it more difficult based on a macroeconomic perspective. It is hard for companies to borrow, and there is less liquidity."

Warren at T. Rowe Price says that Latin American stocks were supported by some powerful tailwinds last year. Low global interest rates, a strong rebound in commodity prices and improved capital flows to the region improved economic conditions.

He expects the Brazilian market to outperform the rest of the region due to economic reforms. "There were significant advances in fiscal reform and excellent trade numbers," he says. "The fall in inflation expectations allowed the central bank to lower domestic interest rates aggressively. It sets the scene for continued recovery." The fund has about 2% of assets invested in Mexican and Brazilian companies that include Groupo Pao de Acucar, Petrobas, Wal-Mart de Mexico, Femsa, America Movil and Group Financiero.