Our Current Thoughts on International Investing

I write theMorningstar InternationalInvestornewsletter. On Oct. 8, I sent out the following interim update to subscribers with some of my current thoughts on international investing.

With the incredible volatility in international stock markets in the past few weeks, I thought I would send out an interim note. I've previously mentioned that in August I spoke at the Money Show in San Francisco. As a follow-up, MoneyShow.com published an interview with me on its Web site last week. One question I was asked: What is the biggest risk from here? I answered that it is European Central Bank President Jean-Claude Trichet's refusal to cut interest rates.

However, with the coordinated interest-rate cut this morning among the United States, the United Kingdom, and the European Central Bank and a few other central banks, the seriousness of the current crises seems to be sinking in for European leaders. Although volatility in the stock markets will likely continue, I think that the worst is over. It is important to remember that the stock market looks ahead. The markets have already priced in a pretty ugly recession. I think the coordinated cut is important as it reduces rates charged on variable interest-rate accounts. It also shows that world leaders are starting to act together to solve the credit crises. The fundamental issue is getting credit to move. Currently banks and some corporations want to hoard cash in case they need it. This is keeping banks from lending money. Banks and corporations that need short-term funding to operate are finding that there is no money to be had. Without money to operate, companies will have to cut back on production and employees. As layoffs increase, consumer spending will fall further, reinforcing the vicious cycle as demand for companies' products declines.

In this environment it becomes critical to own companies with strong balance sheets that don't have short-term liquidity issues. I have been taking this opportunity to upgrade the quality of the Passport Portfolio and am looking at several other interesting companies. I will discuss these issues further in the November issue of Morningstar InternationalInvestor. In the meantime, remember not to panic; stock markets are cyclical and will rebound again.