Global Economy Back From the Brink

A recovery takes shape in Europe, and growth picks up in China.

When Mario Draghi, president of the European Central Bank, said on July 26 that he was prepared to do "whatever it takes" to save the euro, he altered the course of the European crisis -- and that of global stock markets. The Euro Stoxx 50 index of European shares gained 15% from the day Draghi made his comment through November 7, more than offsetting what had been a 5% loss for the index in 2012. Overall, foreign stocks gained 10% in 2012, as measured by the MSCI EAFE index, trailing the U.S. market, as measured by Standard & Poor’s 500-stock index, by almost three percentage points.

The threat of catastrophe in Europe is receding. Draghi followed up on his words with action by creating a bond-buying program to act as a backstop against disaster. Greece might still leave the currency union, but its exit likely wouldn't spark the kind of crisis that once seemed possible. The International Monetary Fund forecasts that the economies of Europe will expand by an anemic 0.2% in 2013, better than was expected just months ago.

Meanwhile, Chinese growth, which is down sharply because of decreased demand from Europe, reduced government spending and tighter monetary policy, will soon bounce back. The world's second-largest economy could easily expand by more than 8% (after inflation) in 2013.

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Combine those improvements with the likelihood that U.S. politicians will steer away from the fiscal cliff, and the world might not look so gloomy after all. The MSCI EAFE index could notch 6% to 9% gains in 2013; the MSCI Emerging Markets index could serve up returns of 10% to 15%.

The best opportunities abroad lie among companies that sell to consumers in developing nations. Companies that focus on wants rather than needs -- such as luxury retailers Burberry (symbol BURBY (opens in new tab)) and Richemont (symbol CFRUY (opens in new tab)), based in England and Switzerland respectively, and German automakers BMW, Audi and Daimler -- sell at favorable prices relative to earnings and can capitalize on growing wealth in emerging nations. The best opportunities among local emerging-markets stocks are companies that cater to domestic demand, such as Hang Lung Properties (symbol HNLGY (opens in new tab)), which develops Chinese shopping malls, and Jubilant FoodWorks, which owns the franchise rights to Dunkin' Donuts and Domino's Pizza in India.

Fund investors should consider Dodge & Cox International Stock (symbol DODFX (opens in new tab)) and Harbor International (HIINX (opens in new tab)) for developed-market shares. For developing-nation stocks, look to T. Rowe Price Emerging Markets Stock (PRMSX (opens in new tab)). All are members of the Kiplinger 25.

Any number of unforeseen events could derail this delicate improvement in global prospects. Yet one country could offer a pleasant surprise. "With Japanese stocks flat for almost 30 years, the perception has been that Japan is where shareholder money goes to die," says Rob Taylor, co-manager of Oakmark International. Today, he sees big improvements in how Japanese companies deploy cash via dividend hikes and share buybacks. The stocks are cheap, even given depressed corporate earnings. Martin Jansen, manager of ING International Value, says the stocks could rise 20% in 2013.

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Anne Kates Smith
Executive Editor, Kiplinger's Personal Finance

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage,  authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.