Overseas Investment Risks

by Alan Lavine and Gail Liberman

A lot of money managers still have high expectations for foreign stocks. But if you invest abroad, consider the risks.

Emerging markets are extremely overvalued and due for a pull back, believes Jeremy Grantham, chief strategist and chairman of Grantham, Mayo and Van Otterloo, Boston.

In China, the greatest risk may be optimism based on country’s strong economic growth.

Be sure to consider the risk labor unrest poses to the country’s capital markets. For example, 80,000 petroleum workers in northeast China protested wages and working conditions in 2002. Meanwhile, stocks in the China region experienced double-digit losses.

Kate Weingart, author of “Working in China” (AuthorHouse) said the country’s labor problems are similar to those the United States experienced in the early 20th century. There have been large numbers of strikes involving thousands of people over the past few years. Reasons: Wage inequality between rural and urban workers; benefit inequality between government and private business workers; and poor working conditions for unskilled laborers.

“The labor problems are a risk to the financial system and the markets,” believes Weingart, professor of Organizational Leadership at Purdue University.

Other potential problems cited by analysts: Economic problems in the United States could impact the rest of the world, particularly exporting countries, like China.

Grantham said the real risks to the world financial markets are worldwide political risk or some type of crisis—not economic.

“The biggest risk over the next couple of years is if something bad unexpectedly happens to the United States,” he said. “It echoes around the world. It is not the economy, but a couple of random things that could go wrong. Then you could see a quarter with 20 percent losses in the foreign markets.”

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.