International stocks and mutual funds are expected to extend their impressive rally of this year into 2007, with more investors pouring money into them, Florida’s Sun-Sentinel reports.

Large-cap international value and emerging-markets funds have returned nearly 30% this year, compared to 13% for the diversified U.S. fund. By region, European funds are up more than 30%, Latin American, up more than 40% and China, up more than 50%.

While emerging-markets funds are expected to continue to offer large upsides into 2007, they are also seen as the biggest risk. Thus, experts advise investors to invest in companies in developed countries or in U.S. companies doing business overseas. In fact, many are predicting that stock markets in developed countries outside the U.S. will outpace U.S. markets.

“As large-cap value investors in the world’s developed markets, we are optimistic about investment opportunities for Europe, Japan, Australia and Hong Kong in 2007,” said Robert Lyon, portfolio manager of the MainStay ICAP International Fund. “Even though the European Central Bank and Bank of Japan will be [raising] rates, the impact of increased corporate profits will far exceed that slight dampening effect.” Lyon is also encouraged by corporate restructurings and return on equity.

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