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Why Foreign Stocks Are Slipping : Other Economies Are Down; a U.S. Recovery May Not Help Them

March 13, 1992|TOM PETRUNO

Good news is bad news: The U.S. economy is recovering, so interest rates are rising and stock prices are falling.

Bad news is bad news: Britain, continental Europe and Japan all appear to be sinking deeper into recession, so foreign stock prices are falling.

That's the nice thing about global investing these days--the outlook has been greatly simplified. Everybody's doing lousy.

After a tremendous surge in stock markets worldwide during January and February, there's trouble all around now. Morgan Stanley Capital International, which tracks stocks in 36 markets around the globe, shows nearly two-thirds of them tumbling so far in March.

The decline is led by Japan, where stocks are off 5.2% this month and 14.4% year-to-date. But the losers' list includes many markets that rose sharply last year and early this year on expectations of an improving global economy--including Mexico, Switzerland, Spain and, of course, the United States.

The irony is that there is renewed economic growth in this country. Unfortunately, our major trading partners have severe problems, and our turnaround won't help them much in the short-term, some experts say.

"The fantasy earlier this year was that the U.S. was going to recover and pull the rest of the world out of recession," says G. Christian Wignall, chief investment officer for GT Global mutual funds in San Francisco.

Over the last two weeks, however, investors have sobered up. Outside the United States, the world's leading economies seem likely to get weaker before they get stronger:

* In Japan, "Weakness in the financial sector of the economy has spread to housing, and even consumers there are starting to cut back," says Allen Sinai, chief economist at Boston Co. Interest rates are relatively high, and the bitter trade battle with the United States is depressing investor sentiment further.

What's more, some analysts believe that the Japanese stock market's ongoing slump may portend an imminent crash of inflated Tokyo real estate values--which would have horrendous implications for Japanese banks and corporations with property holdings.

* In Britain, the Conservative government unnerved the stock market this week by calling for an April 9 election. Investors viewed that as a sure sign that the government expects the economy to worsen this spring. If things were looking up, the Conservatives would have wanted to wait so they could reap voters' goodwill.

On the London Stock Exchange, the Financial Times 100 index plunged 52.4 points Wednesday and 29.1 points Thursday, to 2,493.30.

* In Germany, the nation's central bank (the Bundesbank) is keeping interest rates up even as the economy slows further. The price of German reunification has been abnormally high inflation: It ran at a 4.3% annual rate in February, up from 4% in January, the government said this week.

Germany abhors inflation more than any other economic threat, and the Germans seem willing to sink deep into recession--pulling the rest of Europe down as well--until inflation goes away. "I'm sure the Bundesbank isn't going to ease interest rates under these circumstances," says Michael Sherman, stock market strategist at Shearson Lehman Bros. in New York.

Add it all up, says GT's Wignall, and "it's extremely hard to see how Europe and Japan can recover in the short term."

Slowing foreign economies also threaten the U.S. recovery in that there will be less demand for our exports--the one bright spot in the American economy last year.

But the sheer size of our consumer economy guarantees that we can keep our recovery alive even with a deeper recession overseas, Sinai says. After nearly two years of restrained consumer spending, "if U.S. consumers spend just on the necessities this year, it will be enough to give us an economic expansion," he says. It won't be much to write home about, but it might be something to write about to German or Japanese friends.

The problem for investors is that the divergence of the U.S. and foreign economies means that there won't be many places to find rising stock prices this spring. In America, some investors are anticipating that higher interest rates will accompany the recovery--so they're taking profits in stocks and waiting for a turnaround in corporate earnings this summer or fall to justify getting back in.

In most foreign markets, investors tend not to look very far ahead--they deal much more with the here and now. Because the here and now is looking bleak, foreign stocks are fast losing their appeal with home-country investors.

This is not the end of the world. Outside of Japan, most world stock markets aren't likely to collapse. They may just lose another 10% or so of their value before stabilizing, savvy money managers believe. At some point this year, it's a good bet that interest rates will begin to come down overseas, as they already have in the United States, leading to a surge in stock prices.

For the average investor eager to invest here and/or abroad, the best advice is take it slowly. Don't try to pick the bottom, but be aware that stocks will probably come cheaper if you wait.

Trouble Worldwide

Stock markets around the globe have begun to crack this month on economic worries, following sharp gains in January and February. Some of the hardest hit:

Stock market returns: Country 1991 Yr-to-date March Japan -0.5% -14.4% -5.2% Italy -2.2% +3.4% -3.8% Philippines +77.1% +4.8% -3.8% New Zealand +22.5% -3.0% -3.0% Malaysia +3.8% +4.6% -3.0% Canada +7.9% -0.4% -2.7% Mexico +131.9% +24.6% -2.3% United States +27.2% -3.0% -2.0% Switzerland +21.5% +8.3% -1.9% Britain +15.3% +2.2% -1.1% Spain +12.9% +8.1% -1.1%

Results are in native currencies. 1992 data through Wednesday.

Source: Morgan Stanley Capital International

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