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So, you think investing is pretty tough with the U.S. stock market in the pits? It's hardly better beyond U.S. borders. As currency troubles in Argentina, Turkey, and East Asia mount, the phrase "global contagion" is once again falling from the lips of economists. It's far too early to declare a crisis, but the mere prospect of synchronized economic trouble worldwide is rattling investors worldwide.
Just look at the widely-followed JP Morgan Emerging Markets bond index, which recently hit a six-month low. Says Kamal Shamar, currency strategist at Commerzbank in London: "People want to stand on the side lines and be safe. The fear that the Argentine crisis could hit the U.S. makes people more risk averse," he says. And that risk aversion has a domino effect. The fear of buying corporate debt as well as currencies in countries with financial and economic woes leads to more weakness.
EURO-FREE ZONES. When investors see a crisis like this, they generally head straight for U.S. Treasuries and the dollar. But with the dollar's value close to 12-month highs against the European Union's euro and Japan's yen, and interest rates continuing to fall in the U.S. as the Federal Reserve's easing campaign continues, there are other safe harbors around the globe that hold some charm.
Two not-so-usual choices might be the Swiss franc and the British pound, experts say. And while bonds are typically safer than equities at times of chaotic market conditions, some even see safety in typically higher-risk small-cap stocks.
Sterling and Switzerland's franc can be viewed as havens since neither is tied to the beleaguered euro, Shamar says. Among the major currencies, logic would suggest that investors could find safety in the euro, since Europe would be hurt less by a potential Latin America crisis than the U.S. Not so, in this case. The already struggling euro is weighed down by negative sentiment about the region's dismal growth prospects and heavy investment by Spain, a Euroland member, in Argentina.
EASTERN EXPOSURE. Since the start of 2001, neither the pound nor the franc has done especially well next to the brawny dollar, but these are historically stable currencies, Shamar says. In addition, neither Britain nor Switzerland has the kind of exposure to emerging markets that some European Union members' banks have. This time around, the Deutschemark, which was seen as a flight-to-quality investment during the global market meltdown of the late '90s, is less attractive. This is because German banks have significant exposure to Eastern Europe, where economic problems continue to worsen.
Shamar expects the currencies of Switzerland and the Britain to benefit from their economic neutrality, though Britain may be somewhat less neutral since it has stronger trade ties than Switzerland with the European Union economies. Investors don't have to learn the intricacies of currency trading to buy these countries' currencies. Government bonds or mutual-funds that specialize in Britain or Switzerland are accessible ways to invest.
If you're leery of going abroad at a time when fear can dominate global markets, you could stay at home and take a look at small-cap stocks. It may seem counterintuitive, but putting money in small-caps, typically a risky move, may be one way to avoid any global fallout, says William Julian, a small-cap stock analyst at Salomon Smith Barney.
Small U.S. companies -- those with under $1 billion in market capitalization -- are typically far less reliant on foreign companies for their business. According to Julian, outfits of this size have, on average, 10.9% of their sales to companies abroad, while large-cap companies, those with over $8 billion in market capitalization, have an average 22.2% of sales to foreign companies.
SAFE AT HOME? Of course, investors need to make sure any small-cap company has a solid product or a service that's in demand. That said, "If you believe the U.S. is the healthiest economy and will be the first to recover, these stocks are where you want to be," Julian says. Financial services like mortgage and insurance companies PMI Group (PMI
) and MGIC Investment Corp. (MTG
), and savings and loans like Golden State Bancorp Inc. (GSB
) and Sovereign Bancorp (SOV
), have virtually no foreign exposure, he adds. Historically, financial-service companies of all sizes are the first to benefit coming out of a slowdown.
For those who want to brave equities around the world, global portfolio managers are honing in on companies with the least amount of debt on their books. Managing high levels of debt is no easy task in this environment, even though interest rates are falling in many regions. Says Rosemary Sagar, managing director of global investments at US Trust: "We're staying away from anyone who's highly leveraged. The risks of high debt are too much."
Sagar's biggest holding in Asia right now: video-game maker Nintendo, which fits her low-debt standard. Another Sagar pick: France's Alstom, one of the top three power generators in the world. Alstom has substantial debt on its books, but the company is in the process of a restructuring that should reduce it.
THE FEAR FACTOR. At this point, most observers agree that the vulnerabilities of the world's economies don't make for a doomsday scenario. The global slowdown we've seen was sparked by lower U.S. demand, so a recovery in the U.S. later this year or early in 2002 might save the day. "The risk is in headlines about contagion reaching investors who know very little about the situation," says Lara Rhame, currency analyst at Brown Brothers Harriman.
It's too soon to say we're headed for a crisis on the scale of the Russian loan default of 1998 or the Asian economic crisis in 1997, especially since investors have been moving out of emerging markets for some time. The week of July 16, Argentina's government, which many feared would touch off a cascade effect in other regions, managed to cobble together a plan to reduce its huge deficit, staving off worries for the time being.
Nonetheless, even if Argentina doesn't spark a panic, there are other woebegone nations that might. For investors who fear a global meltdown, there are places besides the mighty greenback to wait out the storm.
Tsao covers financial markets for BW Online in New York Edited by Beth Belton
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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