Foreign stocks prove to be toxic for U.S. investors

Many Americans have turned their backs on foreign stocks this year. Those who did have saved themselves from worse pain in their portfolios.

The double whammy of sinking foreign markets and a surging dollar has made for miserable returns for U.S. investors in many foreign-stock mutual funds -- compounding last year’s heavy losses.

The trend worsened Tuesday after credit-rating firm Moody’s Investors Service warned of rising loan woes for Eastern European banks, which Moody’s said would mean more trouble for the Western European parents of those banks.

Eastern Europe “looks to be the latest shoe to drop in the global financial crisis,” said Nick Bennenbroek, currency strategist at Wells Fargo Bank.

Moody’s warning triggered sharp sell-offs in stock markets across Eastern and Western Europe on Tuesday. Poland’s market plunged 6.6%, Austria’s main index sank 7.1% and the French market lost 2.9%.

Many of those markets fell further Wednesday, though the losses were muted.

The Moody’s report also severely undercut the value of the euro. It tumbled from $1.28 on Monday to $1.256 on Wednesday, near a two-year low.

A falling euro devalues European securities owned by U.S. investors. To illustrate: The German market is down 12.6% this year in euros but is down 21.2% measured in dollars. The U.S. Standard & Poor’s 500 index, by contrast, is down 12.7%.

The picture is mixed in Asia. Measured in dollars, the Japanese market is down 16% this year and Australia’s market is off 15%. But China, Hong Kong and Taiwan have been faring better than Wall Street.

For 401(k) plan investors, these numbers are likely to be most relevant: The average foreign-stock mutual fund was down 12.9% year to date through Tuesday, versus a 9.4% loss for the average U.S. fund, according to Morningstar Inc.

Last year, the average foreign fund slumped 44.3%, compared with a 35.7% loss for the average U.S. fund.

U.S. investors had been rabid buyers of foreign funds from 2003 through 2007, riding the hot overseas bull market then.

But so far this year, Americans are coming home: Foreign stock funds offered to U.S. investors had a total net cash outflow of $1.7 billion through Feb. 11, compared with a net inflow of $2.5 billion for domestic funds, according to the Investment Company Institute.

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