IN January, conventional wisdom said that three long-term trends were likely to persist in 2011: the dollar would continue to fall, commodities would keep roaring and foreign stocks would outpace domestic ones.

Two of these predictions have gone awry since early May, as the dollar has surged 5 percent against the euro while commodity prices have sunk by more than 19 percent. These developments may also lessen the appeal of foreign stocks, some market strategists say, worsening the odds for the third prediction, too.

So far this year, shares of companies in developed markets overseas have risen 3 percent, less than half the gain of the Standard Poor’s 500 index.

Emerging markets, meanwhile, have had a worse start to the year. Shares of companies in fast-growing economies like India and Brazil have lost value while returns for Chinese stocks have been relatively flat.

Chalk it up to a couple of factors, strategists say. First, China has been stepping on the fiscal brakes, aiming to prevent asset bubbles in its red-hot economy. And central banks throughout the emerging markets — including India and Brazil — have begun to raise interest rates in an effort to slow inflation.

These moves help to account for the recent pullback in commodity prices. Crude oil, for example, is down 13 percent from its peak three weeks ago.

But while lower commodity prices may reduce some inflationary pressure in an economy, they often lead to selling in commodity-related sectors of the market, said Alec Young, international equity strategist at S. P.

International stocks generally have higher correlations with commodities markets than do domestic equities. While energy and materials companies make up less than 16 percent of the S. P. 500 index of domestic stocks, those two categories account for 27 percent of emerging-market stocks.

“For a long time, that was a good thing for the emerging markets,” Mr. Young added. “But right now commodities seem increasingly volatile,” and that could create a headwind for those markets’ shares.

Mark D. Luschini, chief investment strategist at Janney Montgomery Scott, said companies in commodity-producing countries like Russia and Brazil could struggle, not just because of uncertainty in raw material prices, but also because so much of their growth is tied to serving China’s needs. “If China has a hiccup” stemming from its efforts to slow the economy, he said, “it’s going to cause a blowback to all those emerging-market countries.”

Not everyone thinks these stocks are at such risk. James W. Paulsen, chief investment strategist at Wells Capital Management, says the emerging markets have underperformed domestic shares since last fall, when central banks in developing nations began to tighten monetary policies by lifting interest rates.

“But I think they’re just about done doing that,” he said. And many other risks in emerging markets, he added, have already been priced into the market.

On the other hand, Mr. Paulsen said he expected the dollar to at least stabilize as investors realized that the United States economy was likely to accelerate while economies of other large industrialized nations would probably keep slowing.

Europe, with its debt-related problems, is growing at roughly half the pace of the United States while Japan’s economy has been disrupted by the recent earthquake and tsunami. If the dollar strengthens, Mr. Paulsen said, American investors will lose an advantage they have enjoyed in foreign stocks: price appreciation based on a weakening dollar.

ALL of this could make investing in Europe and Japan less appealing. And more uncertainty could also refocus investor attention on valuation, another fundamental factor.

While there is a growing sense that stocks in general are becoming expensive, strategists agree that one market area is still relatively cheap: large, blue-chip companies with little debt and with stable, though unspectacular, earnings growth. This group of so-called high-quality companies would include names like Microsoft and Coca-Cola.

What’s more, the bigger these high-quality stocks are, the cheaper they seem to be, said Ben Inker, head of asset allocation at the asset manager GMO.

Yet for reasons Mr. Inker said he didn’t quite understand, “the domestic market has far more than its share of these types of stocks than foreign markets do.”

That’s just one more reason that foreign investing could be a whole lot harder this year.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

Article source: http://www.nytimes.com/2011/05/22/your-money/22fund.html?partner=rss&emc=rss