View items related to this story


The lofty Dow may mean this is a good time to diversify out of U.S. holdings

Feeling jumpy? Is the daily turbulence of the Dow Jones industrial average making your stomach churn? For relief, do what global investors do: Step back and look at the world as an investment supermarket in which U.S. stocks are just one of many categories of products. The New Year is a good time to redeploy your resources, perhaps in countries that once may have seemed exotic but that now, thanks to the globalizing economy, appear even in conservative portfolios.

American investors who want to diversify out of their home market can choose among more than 300 open-end global mutual funds whose managers pick stocks around the world. Your first step, though, is deciding how much money to commit to each country or region. Many money managers believe that figuring out where the winds are blowing favorably for profit growth is even more important in building a successful portfolio than finding hot stocks.

Monitoring such trends is the job of Ron Chapman, head of international equities at Dreyfus Corp., who oversees four global funds with a total of $425 million in assets. He thinks disinflation will be the single most important benign influence on global financial markets over the next several years. That should provide a nurturing environment for stocks, especially in the developed world, where real interest rates remain historically high.

STORMY WEATHER? Another global trend fueling Chapman's optimism is that growth rates in the developed world no longer fluctuate wildly. ''Investors don't appreciate well enough what a prolonged period of low volatility in growth would mean,'' he says. Predictable earnings growth should power stock prices even if economic growth stays low.

Despite the moderate climate, many experts see storms ahead for U.S. stocks in 1997. Stephen Dexter, who co-manages the $500 million, purely non-U.S. Kemper International Fund, sees far better value in continental Europe. Even after healthy performances in 1996, European large-cap stocks are on average trading at 12 to 16 times estimated 1997 earnings, compared with 18 to 19 times in the U.S.

Dexter has loaded up on European pharmaceuticals such as Ciba-Geigy, Roche, and Bayer. He also favors a few big industrial names, including Veba and Mannesmann. Many such companies are downsizing--a good omen for future profits. ''European companies are just now realizing that they're fat, ugly, and inefficient,'' says Dexter.

Other transformations are boosting Europe's potential for above-average stock gains. The movement to privatize pension systems in Germany, Italy, and elsewhere will create a vast pool of capital in search of returns that beat the money markets. Also, as state-owned companies go private and as the banking and corporate sectors dismantle inefficient cross-holdings, many more people will have a chance to buy stocks. ''It's very dangerous to be out of the equity markets now in Europe,'' says Thomas S. White Jr., chief investment officer at Chicago's Lord Asset Management, which controls some $450 million.

Spreading assets around the Continent can help you make the most of these trends. At Bankers Trust, Managing Director Michael Levy points out that the economies of Germany and France have complementary strengths. While Germany's large industrial companies are further along the road to U.S.-style restructuring, such French consumer names as Carrefour, LVMH, Christian Dior, and Danone are more diversified globally. Levy is also excited about Ireland, which he expects to perform strongly in the coming year. Its gross domestic product grew by 6.4% in 1996--the fastest in the European Union--and inflation is low. Levy anticipates a ''peace dividend'' as anti-British terrorism abates.

In carving up the global pie, most asset allocators are reluctant to leave out Japan, the world's second-largest economy. But many are cautious about giving the market its full weight in their portfolios. Deep-rooted problems remain in the financial sector, an important driver of Tokyo's stock index. And when it comes to efficiency, Japan is far behind the U.S. ''No country in the world has more potential to improve its profitability than Japan,'' says White. The question is whether companies will get around to it this year.

ENTHUSIASM. So a number of fund managers emphasize stockpicking in Japan more than in other markets. Kemper's Dexter, for example, is concentrating on such exporters as Toyota, Honda, Canon, and Olympus. And Douglas Johnson, senior international investment strategist at Merrill Lynch & Co., favors machine-tool makers, computer companies, and software providers, whose goods and services will help other corporations trim their bloated costs.

Johnson and Dreyfus' Chapman both think the Japanese market could get a boost if domestic investors, tired of below-average money-market returns, come back to equities. With stocks selling at an average price-earnings ratio of 32--low for Japan--and interest rates likely to stay down, Chapman calls Japan ''the only place in the world that's struggling to begin a new bull market.''

Elsewhere in Asia, Hong Kong stands out as a market that inspires enthusiasm for the year ahead. Even after rising 27% in 1996, ''it's still one of the cheapest markets in the world,'' says Dexter, who points out its overall p-e ratio of only 12 to 13. Levy believes the territory's handover to Chinese rule will boost property stocks, as rich Chinese buy up apartments and office buildings. And he thinks financial-services companies will thrive as more money pours into financial assets. Levy sees p-e ratios for such stocks rising by around 10% in the next couple of years and thinks the Hang Seng index will be at 18,000 by the end of 1998, up from 12,900 now.

Emerging Asia, as a region, is less expensive than Latin America, but asset allocators are cautious about flinging money into all the ''tigers.'' Levy says he will be overweighting Singapore, which stands to benefit from a rebound in the global electronics industry. For the same reason, Merrill Lynch favors the Korean market, ''which looks like a giant semiconductor stock.'' Most globalists recommend having a little money in Thailand, too, where interest rates are expected to come down as the country improves its current-account balance.

Latin America may be the toughest call among the emerging markets in 1997. Last year, money flooded into high-yielding Brady bonds and other Latin debt, and many experts think that investors will take their ample profits from those instruments and put the proceeds into stocks. Yet major markets, such as Mexico and Brazil, tend to catch influenza when the Dow sneezes, so selectivity is important.

LATIN QUARTER. Mexican stocks overall are trading at only around 10 times estimated 1997 earnings, but exporters such as oil-pipe maker Tamsa and deregulation plays like Televisa get more votes than domestic retailers, which may wait a long time before recession-weary Mexicans open their wallets. And Dexter notes that the 50% runup in dollar terms in the Brazilian market during 1996 was due entirely to state-owned Telebrs and Petrobrs. If you factor out those stocks, the market looks pricey.

Chapman points out that Morgan Stanley & Co.'s emerging-markets index was up 20% last year--about the same as developed markets. Since the dynamic economies of Asia and Latin America will generally keep delivering faster earnings growth than the big industrial economies, that means the new markets are relatively free of froth. The bottom line? ''You can't at this point in history ignore the fastest-growing part of the planet,'' says Chapman. ''But you don't buy [emerging markets] at any price.''

Looking for a good growth story where they speak English? Canada's chronic fiscal problems are getting rapidly fixed, by the federal and provincial governments alike, as the country's social and corporate welfare programs are trimmed. Although stock prices averaging 15 times estimated earnings aren't cheap, tame inflation and a healthy U.S. economy that eats up 80% of Canadian exports bode well for corporate profits. ''Investors have been too wrapped up in the U.S.,'' says Johnson. Soothing that Dow-inspired heartburn can be as easy as looking across the northern border.

By Joan Warner in New York



CHART: How Three Global Experts Carve Up the World: Ron Chapman...

CHART:...Douglas Johnson, and Steve Dexter

Return to top of story


Updated June 13, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
Terms of Use