09/09/96 GLOBAL INVESTING (int'l edition)

GLOBAL INVESTING (int'l edition)
Whether you follow trends or just hunt for bargains, these days, the worldwide bourse is the place to shop
After stock markets close every weeknight, a bank of high-powered computers hums to life in the waterfront offices of Boston money manager Gary L. Bergstrom. Trolling through database after database in search of earnings surprises and price moves, the computers gather the latest figures on some 20,000 companies trading on 60 bourses around the globe. The object of the search: to find well-run, world-class companies that offer exciting growth potential but sell at bargain valuations.
With many global bourses up by double digits so far this year, you might think that's an impossible task. But Bergstrom, president of Acadian Asset Management Inc., is having anything but a hard time finding attractive additions for the $3.5 billion worth of mutual- and pension-fund accounts he oversees. From Japanese electronics giant Hitachi to HSBC Holdings PLC, the Anglo-Asian banking group that sells for a downscale 10 times earnings despite its awesome profitability and global reach, Bergstrom has been turning up any number of solid, dynamic--and cheap--stocks to buy. Noting that most of the big markets have lagged Wall Street's stellar rally, ``now it's time for them to play catch-up,'' he says. ``There are going to be some very good opportunities outside the U.S.''
Bergstrom is hardly the only money manager finding plenty of justification to look at global bourses right now. Many Wall Streeters are nervously waiting to see if U.S. interest rates will rise and the Dow Jones industrial average, now nearing a record high again, will stage a reprise of its 432-point decline of a few months ago. So a lot of them--and plenty of individual investors--are looking hard at markets from Bangkok to Brussels for everything from diversification and safety to growth and income. ``I'm very bullish,'' says Helen Young Hayes, manager of the Janus Overseas and Worldwide funds. With good reason. Corporate profits, especially outside the U.S., are surging.
BZW Securities Ltd., a London investment bank, estimates earnings will be up by about 8% in North America but close to 40% worldwide in 1996, with an additional 17% gain in store for '97. One reason for the expected increases: corporate restructurings, most notably in Europe, where slimdowns, outsourcings, spin-offs, and other American-bred techniques are cheering shareholders at Daimler Benz, Deutsche Bank, and a host of other manufacturing and financial companies.
Helping corporate makeovers take root is an improving world economic climate, which is as benign as it has been for years (charts). The U.S. economy may slow by late 1996 or early '97. But other economies are gaining steam. This means that growth across the industrialized world is picking up for the first time since 1989. This recovery is sure to bring good fortune to consumer stocks, helping to explain why many fund managers have been piling into Japanese retailers still on the mend from the country's five-year economic slump.
Most of the economies of the developing world, meanwhile, are continuing to expand at a robust pace. Mexico alone grew by a torrid 7.2% in the second quarter, as its strong rebound from the 1994-95 devaluation crisis gained momentum--the main explanation for the Mexico City bolsa's stunning gain of 25% this year in dollar terms.
Despite this global growth pickup, inflation remains hard to find. And governments around the world are gritting their teeth and concentrating on keeping their budgets in check. The bottom line: Global interest rates should stay subdued well into next year.
True, if the expected U.S. slowdown fails to materialize, the Federal Reserve may raise rates 25 basis points this fall as insurance against an outbreak of inflation. The Bank of Japan may also push up its discount rate a smidgen from its record-low 0.5% to keep the Japanese economy moving ahead at a sustainable pace. But no one is looking for a wholesale tightening of global liquidity anytime soon.
In fact, many investors have been venturing into Australia and New Zealand lately in the hope that interest rates will stage a pronounced decline. And the usually hard-nosed German Bundesbank defied many traders' expectations on Aug. 22 by cutting short-term rates 30 basis points, to 3%. Since July's interest-rate jitters shook markets worldwide, ``we haven't been spooked for one important reason,'' insists BZW Securities Chief Strategist Michael Hughes, a buyer of stocks worldwide. ``Monetary policy doesn't need to be tightened dramatically at all.''
There are risks to this feel-good scenario. Europe's takeoff could fall victim to the budget deficit cuts that France, Germany, and others plan as the condition for launching a single European Union currency. And the dollar could easily resume its springtime rebound. Any rally would leave U.S. investors carrying foreign-exchange losses on overseas holdings. But a weaker yen would also boost the Japanese economy and swell exporters' profits. That would be especially beneficial for long-term investors in Hitachi, currently trading at a mere 1.1 times book value, a third of the average for the Standard & Poor's 500-stock index.
In addition to currency risk, investors overseas need to consider what could happen on other markets if Wall Street takes another tumble. The U.S. equity-market drop of 6.5% from July 4-16 sent markets down around the globe. Most have since recovered. In fact, over the longer haul, stock markets still tend to go their own way, reflecting local politics, economics, and earnings.

FINDING BIG VALUE IN SMALL CAPS
The independence of one bourse from another is especially true for emerging markets and for small-capitalization stocks on major exchanges. The idea of small-stock value has so captivated Tweedy, Browne Co.'s managers that fully 40% of the stocks in their Global Value fund's portfolio have capitalizations under $1 billion. The portfolio features such unfamiliar--and low-priced--names as Toyo Tec Co., a provider of security guards in Japan. At about $12 per share, the stock sells on the Tokyo over-the-counter market at only 80% of book value--and that includes the equivalent of nearly $12 per share in cash on Toyo Tec's books.
Toyo Tec is hardly the only small stock catching global investors' eyes. John Boich, the manager of the Montgomery International Small-Cap and Growth funds, notes that there are $1.8 trillion worth of equities with capitalizations of $1 billion or less trading on the industrialized world's markets. But because their prices can be volatile and many brokers and money managers overlook these lesser companies in favor of the more liquid blue chips, small-caps often feature lower valuations.
That's good news for bargain-hunters such as Boich. He's big on Dublin's Anglo-Irish Bank, whose market cap is only $250 million. Despite a 7% yield, 15% earnings growth and a squeaky-clean loan portfolio focused on high-quality smaller companies, Anglo-Irish still trades at only 1.5 times book value. Boich points out that larger banks in Britain with similar profiles are fetching twice book. Boich and several others are also buying Bombardier Inc., the Canadian manufacturer of aircraft, rail equipment, and snowmobiles with a market cap of just over $1 billion. With the cheap Canadian dollar, a plan to supply high-speed rail cars to the U.S., and a long-haul corporate jetliner making its debut Aug. 26, Bombardier has ``good prospects and a very strong new-product pipeline,'' notes Ed Miska, co-manager of Evergreen Asset Management Corp.'s Global Leaders fund.
While small caps are catching many investors' fancy, a sustained recovery of consumer spending in Japan is also drawing favorable reviews. But that's certainly not enough to spark a new onrush into Tokyo. Talk of higher interest rates and an expected avalanche of new share issues from troubled banks seeking to repair their tattered balance sheets is giving some money managers the jitters. With the Nikkei stock average up 38%, to 21,000, since July, 1995, many overseas investors ``have exhausted quite a bit of their appetite for Japanese stocks,'' observes Stephen G. Watson, head of the global portfolio team at London's Gartmore Global Partners. Still, among likely winners of a bounceback in consumer demand is Seven-Eleven Japan Co. the nation's No.1 convenience-store operator. With ``a remarkable run of growth in earnings per share,'' Evergreen's Miska considers it to be ``a classic stock.'' Another favorite is Laox Co., a leading retailer of appliances and personal computers. Montgomery's Boich estimates it is trading at about 25 times earnings--comparatively modest by Japanese standards--and expanding its profits by 25% a year.

IN GERMANY AND FRANCE, CLOSELY WATCHED TRENDS
Consumer spending may be luring investors to Japanese shores, but the prospect of a wave of corporate restructurings is drawing stock-pickers to Europe. The Continent's sluggish growth in recent years is increasing pressure on managers to improve shareholder returns. Now, some are. Over the past several months, for example, Swiss Bank Corp. and CS Holding have shaken up Zurich's once-staid banking circles with news of sweeping reorganizations aimed at cutting costs and boosting their profitability. Now, many stock-pickers are eyeing giant Deutsche Bank to see whether its recent purchase of a 5% stake in rival Bayerische Vereinsbank will spark a wave of financial takeovers in Germany. ``The long-overdue consolidation of the German banking industry is finally under way,'' cheers CS First Boston analyst Michael Geiger. He thinks Deutsche's stock could easily gain a tidy 15%.
France, where state lenders are bent backward under bad loans and an overloaded government retirement system, is also in line for a financial shakeout. That's why Montgomery's Boich is betting on Credit Commercial de France, a midsize lender with ``a jewel of an asset-management division'' that stands to gain from an expected shift across Europe to an American-style system of private pensions relying on stocks and bonds. And restructurings are shaking up more than the European financial business. Pharmaceutical makers are also in the midst of a frenzied merger binge that shows no sign of slowing.
The latest product of the binge is Novartis, the result of last spring's $36 billion merger of Switzerland's Ciba-Geigy and Sandoz Ltd.. When it makes its debut in September, Novartis will be the world's second-largest pharmaceutical maker after Glaxo Wellcome PLC, as well as a power in optical equipment and agribusiness. Although its shares haven't started trading yet in Zurich and other cities, analysts are drawing up rosy forecasts.
Merrill Lynch & Co. analyst Janet Dyson figures Novartis will be one of the ``most exciting'' stocks in the global industry, with an annual earnings growth rate of 18% over the next five years. But Reinout Kuipers, head of equities at Trinity Capital Partners in Paris, prefers Novartis' Swiss rival, Roche Holding. He estimates that with as many as seven new drugs coming on line this year and a 20% workforce reduction already completed, Roche should be able to continue generating earnings growth of 20% a year. Plus, the industry is abuzz with rumors that Roche is shopping for a takeover, possibly U.S. drugmaker Warner-Lambert Co.
Along with pharmaceutical stocks, managers are sifting through European technology stocks that got clobbered earlier this year alongside their American brethren. With many issues at 12-month lows, ``there are enormous opportunities here,'' counsels Merrill analyst Anita Farrell, who recommends Nokia, the Finnish cellular-phone maker whose stock took a nosedive when the company's inventories started to bulge last winter.
Nokia's excess stocks have since been worked off, and with the cellular industry's sales growing by 50% a year worldwide, Farrell feels the company will remain a leader. But European equity specialist Stephen Jones of Gartmore prefers Dassault Systemes, a French computer-assisted-design house whose shares have hardly budged since they came out on the NASDAQ stock market and other global exchanges in June. Janus' Hayes estimates Dassault's earnings will grow by 30% a year as its gilt-edged customers--including Boeing, Volkswagen, Honda Motor, and Fujitsu--outsource more design work to cut costs.
Cost-cutting is not only a corporate mission, though. Many investors are plunging into economies where governments have also made deficit reductions their primary mission. Chief among them: Australia and New Zealand, where high interest rates mean valuations of stocks are attractively low.

TAKING A FLYER ON A DEFICIT HAWK
New Aussie Prime Minister John Howard on Aug. 20 unveiled a budget that reduces government spending by 5.5% and aims to wipe out its $8 billion deficit by 1999. Although Howard's plan has sparked protests, it's winning praise from Oakmark International Fund manager David G. Herro, who thinks ``he's going much further than he said he would to bring the economy back.'' Betting the Liberal Prime Minister's plan will help bring rates down, Herro thinks it's ``a no-brainer'' to select National Australia Bank Ltd., now his fund's single largest holding. It boasts low overhead, a solid loan portfolio, and a 7.5% yield. Yet it still trades at only eight times earnings. Herro is also a fan of New Zealand's Lion Nathan Ltd., another company with a p-e of 8. It's a leading brewer at home in New Zealand and is expanding aggressively in China.
Some investors care less about dominant themes, however. They're more interested in buying assets on the cheap. So they are loading up on closed-end international funds, some of which now trade at record discounts from the value of the assets they own.
Closed-end funds hold portfolios of stocks or bonds and are publicly traded like individual stocks. Market experts attribute the discounts on the funds to poor performance, investor unease after July's market shakeup, and increasing competition from WEBS (World Equity Benchmark Shares) and CountryBaskets, open-ended country funds that boast low expenses and trade on U.S. exchanges. Smith Barney Inc. analyst Michael Porter estimates that closed-end emerging-market funds now trade at an average discount of 10% off net asset value, while funds concentrating on the developed world are going for 19% off. ``Real bargains have opened up,'' he says. Among them: Scudder New Europe Fund, which has seen its discount widen from 14% to 21% this year. And the Southern Africa Fund, now selling at a 17% discount, ``looks more attractive to me every day.''
From closed-end funds to small-cap stocks, there are now dozens of ways to participate in the global recovery without having to pay an arm and a leg. As the world economy gains momentum, stock markets should, by all rights, get their piece of the action. Major themes in the world economy--corporate restructuring, takeovers, consumer spending, and more--should also add some spice to the investment spectrum. Even allowing for those inevitable bumps, U-turns, and surprises, the coming year should prove to be a fruitful one for investors who cast a global net.
By William Glasgall in New York, with Gail Edmondson in Paris