It’s not just a cliché. Global markets are more connected than they’ve been at any point in human history. And while that doesn’t please everyone, it’s a trend that’s going to continue for a long time to come.

Most of the time, increasing globalization is extremely positive.

Since the first colonists set foot on these shores, America has at heart been a trading nation. Today, our prosperity depends more than ever on selling our goods and services to an ever-increasing number of global markets, as well as acquiring the fruits of other nations from vital natural resources to manufactured goods. In addition, nations that trade are less likely to go to war and more likely to resolve differences through peaceful and mutually beneficial negotiation.

Global investment by American individuals is, in contrast, a relatively new phenomenon. Despite the continued outperformance of overseas markets, many won’t even buy foreign companies represented by American Depositary Receipts (ADRs), which trade as easily as any NYSE-listed stock. And only a handful dare to venture to buy stocks listed on foreign markets, even in Canada.

One reason for the reluctance is that several popular brokerages like Charles Schwab force US investors to trade through their foreign desks when they buy abroad, slapping them with hefty fees.

In fact, many brokers try to talk individuals out of buying outside US exchanges, warning falsely that it’s too risky and is best left to professionals.

Ironically, US investors now have more options than ever before to buy abroad at a reasonable cost. Interactive Brokers

To be sure, there are risks to investing abroad. Venezuelan President Hugo Chavez’ moves this week toward nationalizing major telecommunications, utility and energy assets illustrate one of the more extreme: the confiscation of assets for inadequate compensation. Such moves in the past have usually been politically appealing in the home country, at least initially. But they’re ultimately disastrous for all.

The trouble in Thailand’s stock market in recent months is another good example of what happens when things go wrong. And the fallout from Canada’s recent proposal to begin taxing income trusts in 2011 shows that potential turmoil isn’t just confined to the developing world.

Dozens of foreign stock markets, however, routinely outperform US stocks by wide margins year after year. And the best performing US companies are generally those that take advantage of opportunities abroad.

In short, you can’t hide your head in the sand and ignore foreign markets, even if you want to. Rather, the best idea is to mix in some foreign exposure in solid companies with the rest of your portfolio.

Foreign-based utilities are one great option for conservative investors. Like US utes, they dominate essential services, which makes their cash flows stable, particularly relative to other companies. They’re also guaranteed to share in their home countries’

growth, since rising demand for communications, energy and water always accompanies economic growth.

Last year was a banner year for many foreign utilities. There are still several compelling opportunities for 2007, but risks have risen as well. To help us navigate this more challenging environment, I interviewed my colleague Yiannis Mostrous, editor of the subscription-based weekly Silk Road Investor

ROGER CONRAD (RC): What are the biggest risks investing outside the US in 2007?

YIANNIS MOSTROUS (YM): I see two major ones. The first is geopolitical turmoil. Rarely, if ever, have we seen so many potential flashpoints, particularly in areas of the world that produce energy.

Everyone is focused on Iraq’s civil war. But Lebanon may be even more dangerous, with Iran backing Hezbollah and the West backing the government. So is the situation in Palestine, where Egypt is now supporting Fatah, while Syria and Iran back Hamas.

The situation on the Horn of Africa is also exceptionally worrisome, particularly now that the US has gotten involved. You’ve got Eritrea in the north of Somalia backing the Islamists and Ethiopia and the US supporting the other side. That’s not far at all from crucial oil shipping lanes.

If you throw in the potential for escalating violence in Iraq, another interruption in Nigerian oil supplies, nationalism threats in Latin America and other potential trouble spots, you’ve got a lot of potential for an energy spike. In fact, Russia is easily the most politically stable of any major global energy exporter.

The second risk is for US economic growth to slow to an annual rate of less than 2 percent, which for me would define a recession. There still aren’t many global economies or markets out there that could really hold up in the face of a major slowdown in the US. In fact, most would probably crash even harder.

Part of that vulnerability is due to the fact that the US remains the most important global market for exports. But you also have to remember that much of the portfolio foreign investment--as opposed to foreign direct investment--even in high growth countries like India is from institutions that like to shift around their bets. And when times are tough, these guys tend to flee back to safe havens like the US, triggering major selloffs in the process.

In my view, the key is the US housing market. If the ongoing decline begins to impact consumer spending in a big way, it could be very difficult for US business spending to compensate. And it won’t take much to turn what’s right now a mild slowdown into something much worse.

RC: What’s the most dangerous market for 2007?

YM: China. No one seems to believe we can have a slowdown there. As a result, expectations are extremely high and it wouldn’t take much to puncture them. There’s obviously a lot of long-term potential there. But history shows markets overshoot and those who follow them can lose a lot of money in the interim.

One potential risk is that the Democratic Congress will push a more protectionist line regarding US trade with China. Whatever you think of President Bush, his administration has been good for expanding American commerce with China. Anything that threatens trade could have devastating consequences for China, as well as the US.

If I had to invest there, I would stick to power generating companies like HUANENG POWER (NYSE: HNP). China needs juice and demand is likely to keep rising even if current rate of economic growth slows. The most at risk sector in the country is banks, for which disappointing economic growth means high short-term growth expectations will deflate fast.

Another way to play China is with Taiwanese companies like CHUNGWA TELECOM (NYSE: CHT). The country’s stocks are cheap, in large part because of its turbulent relationship with the mainland. No one should expect instant results. But if there ever is a rapprochement, that market will take off quickly, just as Hong Kong’s did when it became part of the greater China.

RC: What’s your basic strategy going into the New Year?

YM: For the past month, I’ve been recommending my readers pare back positions. Now I’m back to a core of stocks of very secure companies that operate in the handful of markets I like.

That’s what I intend to stick with until we see whether the US can avoid a recession or not. In my opinion, if the economy can get by until May without a noticeable decline, we’ll be out of the woods and investors can get a good deal more aggressive.

My two favorite markets right now are Japan and Singapore. That’s in large part because both have dynamic growth stories that are not tied to what happens in the US. Consequently, they shouldn’t be blown apart by a potential US recession. They’re also not particularly exposed to the likely geopolitical risks.

Japan is still an export-led nation. But its vulnerability to a slowdown in the US is far less than it’s been in prior decades, when it was so dependent on exports here. Today, growth is being driven by Asia, but also by domestic consumption as a new generation allows itself luxuries its wartime predecessors would not.

I do read every economic report from the country that I can get my hands on, mainly to make sure its recovery is continuing. But I do think it will and that it will remain one of the strongest markets and most shielded from potential trouble in the US.

The bullish case for Singapore is slightly different. The city-state is rapidly becoming the new financial hub for Asia. The government has lifted restrictions on capital and immigration and as a result big global corporations and financial institutions are moving in.

The goal is to make the city a prime place to live, have fun and work, and they appear to be succeeding.

The play here is growing domestic demand and rapidly rising real estate values, as well-heeled expatriates from other countries come to buy. But it’s also great news for essential service companies like SINGAPORE TELECOM (OTC: SGAPY).

RC: The last time we talked, you were very high on India. Where does that rate on your list now?

YM: I’m still high on India long term. The country’s growth story is very much intact. Also, it’s geared toward rising domestic demand, so it shouldn’t be overly affected if the US economy careens into a recession.

On the other hand, India is one of those stock markets where big global institutions like to bet. A tidal wave of big money investment is the primary reason the Indian market has done so well of late. Unfortunately, big money is also notoriously fickle, so the market is vulnerable to massive potential declines if it moves on.

Incidentally, that’s exactly what happened in May and June of 2006.

And that was not in the context of a US recession and corresponding “flight to quality” from developing markets to safe havens.

RC: What about European markets?

YM: There’s no question they’ve been a good place to be, particularly utilities. I think the European markets will again outperform the US market in 2007.

My one caution is, again, if there’s a US recession. The euro’s sphere of influence and the importance of the continent’s economy and markets have definitely grown remarkably over the past few years. But as a native of Europe, I have no problem saying markets there would still be whacked if there’s a recession in the US.

Incidentally, I’m not one of these people calling for the final collapse of the US dollar this year. The buck is still the world’s top currency, just as America’s economy and stock market are the globe’s most important. That will change over time as Asia grows, as my book The Silk Road to Riches

5705-2852050) points out. But it’s not happening this year.

European utilities have had a big run over the past year and it’s hard to find cheap ones. But there are still some that are attractive.

RC: What’s your view on Latin America?

YM: Despite the political turmoil in some countries, I like Latin America’s direction and prospects. The markets there are still tied to the US and wouldn’t escape the blow from a potential recession in this country. But there are enormous growth prospects and for the most part, the people who run the region’s governments realize a healthy business environment is essential to economic progress.

I generally prefer to invest in Latin America via multinationals that do business there, rather than by buying companies native to the region. The notable exceptions are Brazil and, for the slightly more aggressive, Chile.

Again, utilities and telecoms are guaranteed to share in the growth and several do trade as ADRs as well.

RC: You mention Russia as the world’s most stable major energy producing country. Many investors, however, have been disturbed by the government’s aggressive moves to keep a greater share of the proceeds from its oil wealth.

Explain.

YM: Obviously, every country brings its own challenges. My only points are that there’s no doubt about who’s in charge in Russia.

The country is not riven by Islamists that constantly threaten to interrupt the oil flow. And there are some incredible projects there.

A lot of people aren’t happy about what happened to ROYAL DUTCH SHELL (NYSE: RDS.A) when it was forced to cede a majority interest in the Sakhalin Island project. But at the end of the day, Royal Dutch will still make a lot of money off this project. And the same holds true for other super oils that have been forced to renegotiate terms of leasing deals.

In any case, if you’re worried about Russia’s future policy toward foreign corporations, you can still participate in its energy patch by buying its leading energy companies, GAZPROM (OTC: OGZPY) and LUKOIL (OTC: LUKOY). In fact, both are likely to do much better now that the Russian government has forced the renegotiations with super oils.

The Russian stock market is of course very oil price sensitive. If oil cuts under $50 per barrel, things are likely to get cheaper still there. That would make the market more attractive in my opinion.

RC: Do any other developing markets look attractive for US investors?

YM: I like the Philippines, particularly the dominant communications company PHILIPPINE TELECOM (NYSE: PHI). It’s cut debt and continues to grow rapidly, particularly in wireless. It’s also easy for US investors to buy.

Malaysia is a lot more difficult for individuals to buy into. But it’s attractive on two fronts. First, it lagged last year and is therefore cheaper than other Southeast Asian markets. Second, it’s viewed as a defensive market. If we do get that US recession and pullback in the developing world stock markets, this is one that should hold up.

RATE WATCH

The more I look at the market in early 2007, the more I’m convinced interest rates hold the key to what we can expect. And the rate to watch is the benchmark yield for the 10-year Treasury note.

For each of the past four years, the bond market has suffered what can loosely be described as a growth scare. Each time, investors saw some data that seemed to indicate a lift off of economic growth and inflation, and they sold bonds en masse. The selling soon spread to other investments that are considered rate sensitive, including utilities, real estate investment trusts, bank stocks, etc.

Each year, the selloff came in spring, was quite violent and generally lasted until early summer. At that point, economic growth seemed to slow, the panic selling ended and investors came back to bonds and other rate sensitive fare. Last year, in fact, the second-half rally carried income investments to huge gains and new all-time highs.

Income investments rallied well into late 2006. As the New Year approached, however, we began to see some profit taking. The selling has accelerated in the first few weeks of this year, with the 10-year yield creeping over 4.7 percent this week. That’s well off the low of barely 4.4 percent recorded in early December. As a result, utilities have slipped off their highs, as have other income investments.

The clear implication here is a growing number of investors are expecting another spike in interest rates, and that it could occur much earlier in 2007 than it did the past four years. One catalyst, ironically, is the drop in oil prices. Should oil crack below $50 a barrel as the bears expect, it could give the economy a boost but would almost surely stir more fears of inflation.

Another catalyst for a jump in interest rates is the Federal Reserve itself. For several months, market players have expected the central bank to begin cutting rates to spur the economy. Those projections have been baked into bond prices, particularly the benchmark 10-year Treasury note.

Recent statements from several Fed governors, however, have clearly indicated the central bank remains deeply concerned about inflation pressures. If anything, those worries may intensify, if investors come to expect a burst of growth to result from falling energy prices.

As a result, at the very least we’re likely to see an unwinding of expectations that the Fed is going to cut rates over the next few weeks. That’s likely to put upward pressure on the 10-year yield and downward pressure on all things income.

Of course, every rate spike in this environment sows the seeds of its own reversal. That’s because rising rates invariably slow the growth of borrowing, thereby putting the brakes on the economy.

That’s what happened each of the past four years, and nothing has changed.

There are two risks for investors, however. First, if there is a rate spike, income investments across the board are going to take a hit, including those with strong fundamentals. Second, if the rate spike accelerates a decline in US economic growth, the fallout will extend to the entire global market. Also, weaker income investments may have no choice but to cut dividends.

The absolute worst thing you could have done during the past four years was to sell your income investments into the interest-rate spike. I’m convinced that will prove true again if there’s a spike this year, as prices inevitably will rebound when the panic subsides and investors move back to safe, high yield havens.

You can do a couple things to make the ride a little less hair-raising, and ultimately more profitable. First, stick only to quality income investments backed by reliably growing businesses, and avoid chasing anything based solely on a high yield. That’s good advice in any environment, and it will be especially critical if volatility increases.

Last, don’t be afraid to take some money off the table if one of your investments’ core businesses is faltering. It may also make sense to take a profit if a particular investment has grown to a disproportionate chunk of your overall portfolio.

Whatever you do, don’t panic and bail on good investments just because prices have backed off from last year’s highs. As long as you hold quality stocks, preferred shares and bonds--and are broadly diversified between individual holdings and sectors--you’ll be able to ride out the storm while scooping up high income. In fact, odds are we’ll have another great opportunity to add to our holdings, and quite possibly even before spring.