Stocks: What was hot, and not, in foreign markets in 2010

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Stocks mostly advanced worldwide in 2010, but there were wide disparities in performance. And the rising tide of global economic recovery didn’t lift all boats.

Generally, fast-growing emerging-market economies also boasted the hottest equity markets, with the notable exception of China. To earn big returns you mostly had to think small -- say, Peru, or the Philippines.

U.S. mutual fund investors, who continued to favor foreign stock funds over domestic funds in putting new money to work, may not be thrilled with the results in 2010. Through Thursday the average foreign-stock fund was up 13.3% for the year, lagging the 17.5% gain of the average domestic fund, according to Reuters/Lipper data. The average emerging-markets stock fund rallied 19%, but U.S. small-company stock funds typically beat that, with returns topping 26% on average.

A big part of the relative weakness in diversified foreign-fund results stemmed from Europe’s troubles, including the euro’s slide against the dollar.

Here’s a look at market performance in 2010 in the world’s three main economic regions. All returns are quoted in local currency terms. The effect of currency moves on foreign market returns for U.S. investors is discussed at the end of this post:

THE AMERICAS: Latin America’s smallest markets were red-hot in 2010, thanks to their commodity-exporting economies. As prices of metals, agricultural products, oil and other raw materials rose because of higher global consumption and buying by speculators, the exporters naturally benefited.

Peru’s main stock index soared 65.0% for the year, Argentina jumped 51.8%, Chile 37.6% and Colombia 33.4%.

The Mexican market rose 20% and ended the year at an all-time high on the IPC index, at 38,550. The drug war ravaging much of the country has seemingly had no effect on investors’ perception of the equity market.

Canada, another natural-resources-rich economy, saw its stock market rally 14.4% for the year, lagging Latin America but beating the 12.8% rise of the U.S. Standard & Poor’s 500 index.

Brazil, Latin America’s largest economy, was a disappointment overall, with some big stock winners offset by some big losers. The Bovespa share index inched up just 1% for the year, although it was up 19% from its spring low.

ASIA/PACIFIC: China‘s economic strength helped drive growth across Asia in 2010, but stock market returns were surprisingly mixed.

Inflation -- a byproduct of faster growth -- became a bigger issue in Asia last year than in most of the rest of the world. China’s moves to tighten credit, an effort to slow price increases, weighed heavily on the country’s equity markets. The Shanghai composite index fell 14.3%, the worst performance of any Asian market. That was a drag on Hong Kong‘s market, which rose just 5.3% for the year.

Australia‘s central bank also tightened credit in 2010, which pushed interest rates north of 6% on short-term savings accounts at the country’s banks. That was heavy competition for the stock market, which ended the year in the red. The main Aussie stock index eased 2.6%.

In many Asia/Pacific markets, however, the economic growth story continued to bolster demand for equities. The biggest winners included Indonesia, up 46.1%; Thailand, up 40.6%; the Philippines, up 37.6%; South Korea, up 21.9%; and India, up 17.4%.

Finally, Japan -- the perennial disappointment for stock investors -- was a loser again, with the Nikkei-225 index slipping 3%. The country still hasn’t escaped the grip of deflation.

EUROPE: The countries at the center of Europe’s ongoing government-debt crisis suffered some of the year’s worst equity-market losses. Austerity programs forced by the debt crisis are expected to be severe drags on these economies for years.

Greece’s stock market plummeted 35.6% for the year, the Spanish market slumped 17.4%, Italy lost 13.2% and Portugal was down 6.2%. Irish stocks eased a modest 3% for the year but were off 17.5% from their spring high reached before investors understood the gravity of the country’s budget woes.

By contrast, German stocks rallied 16.1% for the year, in part benefiting as money left other euro-zone markets for the relative safety of Germany.

Britain also is facing austerity, but equity investors appear to be viewing that as more positive than negative. The blue-chip FTSE-100 index still managed to gain 9% for the year.

Russia, a major oil and natural gas exporter, saw its stock market advance 23.2% in 2010. Ukraine, a large grain exporter, rocketed 70.2%.

CURRENCY EFFECTS: For Americans invested overseas, foreign-exchange fluctuations were both friend and foe in 2010. The U.S. dollar weakened against many Asian and Latin American currencies, which meant that investments denominated in those currencies were worth more when translated into greenbacks.

The Mexican stock market, for example, was up 20% in peso terms but up 27% in dollars. The Taiwanese market gained 9.6% in the local currency but surged 20.2% in dollars.

But the story was reversed in Europe, where the euro fell against the buck. For U.S. investors, that cut the 2010 turn on German stocks to 8.4% compared with the market’s 16.1% rise in euro terms. And the euro’s slide deepened the losses for U.S. investors in the continent’s worst markets. Spanish stocks slid 22.9% in dollars compared with the 17.4% drop in euro terms.

Many of the largest U.S.-based foreign stock mutual funds have hefty stakes in European shares. That was a big reason why foreign fund performance overall lagged U.S. stock fund returns.

-- Tom Petruno

Top photo: The Cerro Verde copper mine in Peru. Credit: Maik Dobiey / Bloomberg News