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Foreign stocks trip on U.S. troubles, adding to 2008 losses

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Asian stock markets were mostly lower in midday trading on Monday, suggesting that investors across the Pacific weren’t drawing much encouragement from the Bush administration’s proposal to bolster the finances of mortgage giants Fannie Mae and Freddie Mac.

In currency trading, the dollar was mixed against its major rivals. U.S. Treasury bond yields were slightly higher. All in all, it looked like many Asian investors were staying on the sidelines, waiting to see what happens when Wall Street opens.

The bigger picture: Americans who were hoping that foreign stock markets would be a haven this year from the turmoil in the U.S. financial system have had a rude awakening, as the accompanying chart shows.

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Most major foreign stock indexes have suffered significantly larger declines from their 2007-08 highs than the U.S. Standard & Poor’s 500 index, which as of Friday was off 20.8% from its record high reached in October.

Many smaller foreign markets are simply showing their usual volatility, of course: They rose faster than the U.S. market in the good times, and they’re falling faster now that things don’t look so blissful for the global economy.

Some foreign equity markets -- China, in particular -- were bubbles that everybody figured would burst at some point. Maybe America’s troubles accelerated that process, or maybe the bubbles would have exploded without the buzz-kill fallout from Wall Street.

U.S. investors in foreign shares still are getting some benefit from the dollar’s continued weakness against many other currencies. That is acting as a cushion against foreign market declines by making foreign shares denominated in stronger currencies worth more when translated into dollars.

Germany’s DAX stock index, for example, is down about 24% this year measured in euros, but for U.S. investors the decline is 16.6% when measured in dollars.

Still, even with the currency advantage, chances are your foreign stock investments are deeper in the red this year than your U.S. holdings. Through Friday, the average foreign stock mutual fund was down 14.6% year-to-date, according to Morningstar Inc. The average domestic fund was off 11.9%.

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The question still to be answered: Will the ugly turn in overseas stock markets sour Americans on foreign investing? The vast majority of the cash that U.S. investors have shoveled into stock mutual funds since 2002 has gone into foreign funds, not domestic funds. That money has helped to keep those overseas bull markets kicking.

If those hefty cash inflows give way to sustained outflows, foreign markets could be looking at more serious losses unless their local investors take up the slack.

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