06/17/96 STICKING WITH STOCKS, BUT MOVING OVERSEAS

STICKING WITH STOCKS, BUT MOVING OVERSEAS
The big-money pros are hedging their bets by casting a wider net and going global
Edgar E. Peters, director of asset allocation for PanAgora Asset Management, started off 1996 with high hopes for stocks even after the Dow Jones industrial average's torrid advance through 1995. But as he stared at the numbers and headlines flashing on a computer screen in his downtown Boston office one morning in March, Peters knew he had to lighten up on U.S. equities--and fast. An unexpectedly strong report on employment that raised fears of inflation was pushing interest rates on Treasury bonds sharply higher. With the Dow near record highs, Peters recalls, ``that was a danger sign, a wake-up call for stocks.''
As long-term Treasury yields continued to push past 7% over the next several days, Peters started moving big chunks of PanAgora's $15 billion portfolio out of American equities and into U.S. Treasuries as well as stocks overseas. And with Treasury yields likely to remain around 7% a while longer, Peters is in no hurry to reverse direction. ``In a global context,'' he says, ``there is better value elsewhere.''
FEW CONTRARIANS. Among asset allocators, hedge fund operators, global mutual fund managers, and other big-picture investors, Peters has a lot of company right now. To be sure, a few remain steadfastly devoted to U.S. stocks, convinced that American corporations are among the most competitive on earth and deserve robust valuations. And some contrarians, troubled by those same high valuations and worried that the U.S. will become the starting point for a worldwide market rout, are retreating to the relative safety of cash.
But for the most part, the big-money pros feel certain that the bulk of the gains they predicted for Wall Street this year have already been achieved. Thus they're hedging their bets and casting a global net. Few are forsaking equities entirely. Peters, for example, advises investors to continue to keep 60% of their portfolios in stocks--not much different from the asset allocation recommendations many of his peers currently follow for clients with diversified portfolios.
Indeed, with the U.S. economy expected to slow later this year, many pros think the best values are now in stock markets in Latin America, Europe, and Asia, where economic and earnings growth rates are already robust or poised for recovery. ``Among major markets, the U.S. is the least attractive,'' says Robert D. Arnott, president of First Quadrant, a Pasadena (Calif.) money manager with $12 billion in assets.
For Arnott, that means moving money into French bonds and equities in Belgium, Switzerland, Austria, and Spain, where low interest rates are fueling recoveries in economic and earnings growth. Another Eurobooster is Christopher Kwiecinski, chief investment officer for private banking at Banque Indosuez in Paris. He made a bet at the start of the year that German interest rate cuts would give the Continent's bourses a big boost. Now, although Frankfurt and many other European markets have climbed more than 10% since then, Kwiecinski is staying put.
STRONG DOLLAR. Given Germany's recessionary economy and moves across the Continent to cut government deficits in time for the possible launch of a single European Union currency by 1999, Kwiecinski and others argue, there is little chance of the German or other European central banks pushing rates up at all this year. Says William P. Sterling, managing director of BEA Associates, a $50 billion fund management house based in New York: ``The Bundesbank is still in an easing mode, and others will follow its lead.''
True, the likelihood that the greenback will continue to strengthen from last year's record lows could wipe out any gains that U.S. dollar-based investors stand to achieve overseas. That's why Nicholas P. Sargen, chief strategist for J.P. Morgan & Co.'s private bank, is urging clients to hedge their dollar exposure when buying European equities and debt.
Sargen, among others, is also counseling a move into emerging markets, which are still recovering from the turmoil of 1994 and '95. Charles Gradante, co-director of the WPG-Hennessee Hedge Fund Advisory Group, observes that many hedge fund managers are currently following this route after missing out on the Mexican stock market's 20% gain--in dollar terms--so far this year.
TWO CAMPS. In the hedge fund crowd, Gradante says, India is a big favorite despite political uncertainty following the defeat of the ruling Congress Party government. But J.P. Morgan's Sargen thinks a smarter way to approach emerging markets may be to focus on Latin American countries whose economies have yet to catch fire. His favorites include some of the smaller markets, including Ecuador, Venezuela, and Peru, where spreading economic reforms could give stocks and bonds a lift.
When it comes to Japan, the pros are grouped in two opposing camps. Buoyed by record-low interest rates, a recovering economy, and a huge influx of cash from abroad, the Nikkei stock average is up 50% from its 1995 lows. Some pros think further gains lie ahead as the economy strengthens further. But Mark G. Holowesko, a value investor and manager of the Templeton Growth and World funds (page 118), strongly disagrees. Pointing to Japan's sky-high price-earnings ratios, he sniffs that other than Sony Corp., ``we can't find any [Japanese] stocks to be excited about.'' Indeed, Holowesko and many other world-wise pros say they would rather own selected U.S. equities even in the face of a steep average p-e of about 19.
Although hardly bullish on America, Holowesko is loading up on high-yielding real estate investment trusts and is loath to back out of his 5.9million-share position in Merrill Lynch & Co., worth $384 million. Says Holowesko: ``They have distanced themselves from the competition.'' First Quadrant's Arnott, meanwhile, is building a ``very defensive'' portfolio around such high-quality, big-capitalization stocks as Coca-Cola, Hewlett-Packard, and American International Group.
QUANDARY. Then there's Michael Hughes, chief strategist for London's BZW Securities Ltd. Although he is a confirmed globalist, Hughes insists that the U.S. should remain one of the few countries--along with Britain, France, the Netherlands, and Switzerland--to be ``aggressively overweighted'' in any global portfolio. ``I've never detected so much optimism in the corporate sector in the U.S.,'' he says. ``These executives think they can take on Japan and Asia and win.''
For asset allocators such as Hughes, that's the quandary of 1996. With many U.S. equities at record highs and Treasuries and bond markets overseas offering mouth-watering yields and opportunities for capital gains, it's taking more and more guts to advocate plunging into America's choppy stock-market waters. With that fact in mind, it's not a bad time to shop the world market for bargains, values, and growth.
By William Glasgall in New York, with Jay McCormick in Paris