The collapse of these economies dimmed investors’ enthusiasm for
foreign investing. But troubles were also brewing for U.S. investors seek-
ing gains in the developed markets. As the U.S. stock market and the
U.S. dollar soared, the dollar returns in European and Japanese markets
fell behind the United States. The advantage that U.S. investors had
gained through many years of investing abroad vanished, leaving many
questioning the wisdom of international investing.The New Millennium and the Technology Bubble
The last three years of the twentieth century, marked by the emergence
of a huge technology bubble, saw strong gains in all of the world stock
markets, with the European and American markets surging to all-time
highs. But this was not to last.
A few months into the new millennium, the technology bubble
burst and stocks fell into a severe bear market. All of the developed
countries’ markets fell by at least 50 percent: from March 2000 through
October 2002, the U.S. market fell by one-half, matching its record
post-Depression decline in the ferocious 1972 to 1974 bear market,
while European and Japanese markets, which suffered declines of 60
and 63 percent, respectively, bottomed in March 2003—five months
after the U.S. market bottomed and just prior to the U.S.-led invasion
of Iraq.
As the world economy recovered from the 9/11 terrorist attacks
and the recession, stocks in the United States and Europe pushed up-
ward, and by 2007 they hit new all-time highs. But the dollar changed di-
rection sharply. After appreciating strongly from 1995 through 2001, the
greenback sank precipitously, falling by one-third of its value through
the end of 2004. As a result, dollar-based investors saw their interna-
tional stocks far outperform their domestic holdings in a reversal of the
pattern set in the previous decade.
Emerging stock markets, which usually fare far worse than devel-
oped markets in downturns, held up surprisingly well in the 2000 to
2002 bear market, a good portent for future performance. Indeed, when
the world economy had recovered, emerging markets soared once again,
surpassing their highs of a decade earlier.
What have these market cycles taught us about international
stocks? No single market is always dominant, and the globalization of
the world markets affords investors more opportunities for spreading
their risk than are available in the domestic markets.CHAPTER 10 Global Investing and the Rise of China, India, and the Emerging Markets 167