Stock Pickers Look Outside US Market

IN many cases, overseas markets are outperforming the United States stock market - a pattern, experts say, that may continue well into next year. Foreign governments are moving to cut interest rates and expand their economies. And economic growth in the US remains slow.

``Last week, we made a decision that we would change our exposure in overseas equities for our most aggressive portfolios to 20 percent foreign [stocks], up from 15 percent,'' says Lawrence Keblusek, senior vice president of The Northern Trust Company in Chicago. Northern Trust has more than $75 billion under management.

Mr. Keblusek says that he is seeking out overseas stocks that have long-range growth potential, based on such criteria as growth in earnings per share and low debt-to-cash ratios.

With ``democratic forces'' winning out over ``repressive forms of government'' in such places as Eastern Europe and Latin America, there will be a large expansion in overseas stock companies, says James Kermes, senior vice president and chief investment officer at Northern Trust. That growth in equities will ensure that international investing becomes even more important to world financial markets during the next decade, he says.

According to Lipper Analytical Services, equity mutual funds with overseas components have been outperforming funds limited to US issues. The average US equity mutual fund, for example, jumped 5.3 percent for the third quarter ending Sept. 30. That beat the Standard & Poor's 500 index, which climbed 2.6 percent. But the average increase for world funds for the quarter was even better - 7.1 percent. International bond funds also tended to outperform US government bond funds - although equities generally outperform bond funds.

Indexes used by Morgan Stanley & Co. Inc., an investment house, also show overseas markets making substantial gains and in many cases outperforming the US market. ``Overseas markets have been very strong in recent months,'' says a spokeswoman for Morgan Stanley. Equally important, she says, third quarter results show Europe outperforming Asia, which is a major shift from the pattern earlier this year. The Morgan Stanley Capital International Europe Index rose 8.2 percent, compared with an increase of 4.4 percent for Morgan Stanley's Far East Index. Eleven overseas markets followed by Morgan Stanley bested the US market.

The increasing attention to European issues comes as no surprise to many economists. Europe will be a key to how well the global economy expands in 1994 and 1995, says David Hartman, an economist with DRI-McGraw Hill, an economic consulting firm in Lexington, Mass. While many international investors and currency speculators appear to be anticipating a strong uptick in the European economy, Mr. Hartman says, his firm remains more cautious. Part of that caution, he says, stems from concerns about the economic recovery in Germany.

``At the beginning of the 1970s, the US stock market represented about 80 percent of the total capitalization of world equity markets,'' Mr. Kermes says. Today, the US percentage is under 40 percent. ``In a decade, the US share could be 20 percent or less,'' he says. ``As the middle class grows larger'' in nations ``that have come out of repression, more overseas companies'' will be created to meet rising consumer demand, he adds.