Europe controls the fate of international markets in 2012. By Nellie S. Huang, Senior Associate Editor December 2, 2011 Uncertainty ruled world markets in 2011, but one thing was sure: A big bear clawed foreign stocks. Through November 4, the MSCI EAFE index, which tracks stocks in developed nations, tumbled 9%; the MSCI Emerging Markets index fell 12%. Over the same period, Standard & Poor's 500-stock index was flat. SEE ALSO: Our Special Report on How to Be a Better Investor Expect volatility through the early part of 2012, says Virginie Maisonneuve, co-manager of Vanguard International Growth Fund, in part because of unresolved issues from 2011. Details on how to solve Europe’s government-debt crisis still need to be ironed out. Economic growth in China, the world’s growth driver, is slowing, even as inflation worries weigh on markets from Asia to Latin America. Sponsored Content Europe controls the fate of international markets in 2012. As Greece teeters on the precipice of default, it threatens to take Italy, Spain and France with it. If Greece restructures its debt in an orderly, negotiated process, it could renew confidence and boost international markets in the latter half of 2012. But even with a so-called structured default, the future looks grim. “How does Europe get its mojo back?” says Katherine Nixon, chief investment officer with Northern Trust. “It’s a long-term issue with a lot of pain.” Life in Europe, with an average 10.2% unemployment and just 1.6% gross domestic product growth in 2011, already feels recession-like. Growth in 2012, at 1.1%, will be anemic. Advertisement But European stocks are cheap: On average, they trade at 10 times estimated 2012 earnings. (The average historical price-earnings ratio is about 17; the S&P 500 trades at 12 times earnings.) Says David Herro, co-manager of Oakmark International Fund: “European multinationals have gotten clobbered. This is a good opportunity to get in.” (See OPENING SHOT: 8 Stocks to Cash in on Europe's Woes.) If Europe remains risky and developed markets stay volatile, then emerging markets will get even choppier. How China, the largest emerging economy, handles its slowing economic growth is key. If officials lower interest rates too far or too soon, a real estate bubble could reinflate. Wait too long and growth could slow too much. Slow is relative. Even pared down, China’s GDP growth, estimated at 9% in 2012, is impressive. Growth in emerging economies overall should come in at 6% for 2012 -- a lot higher than predicted growth in the U.S. and Europe. Meanwhile, the MSCI Emerging Markets index trades at 9.5 times 2012 earnings, well below the historical average of 15. It may be a great time to buy foreign stocks -- the choppier the market, the better the chance to pick up good companies at a discount, via mutual funds with a proven stock picker at the helm. Advertisement We like Oakmark International (symbol OAKIX) and Tweedy, Browne Global Value (TBGVX). Buy in moderation, during downturns. “There’s no need to put all the money in at one time,” says Oakmark’s Herro. We also like Vanguard International Growth (VWIGX), where co-manager Maisonneuve is focusing on large, European-based multinationals, such as Nestlé and Tesco, that also rely on regions outside the euro zone for a chunk of revenue. In China, she’s betting on the country’s consumers -- retail, food and beverage company China Resources, for example -- rather than its exporters.