As Dollar Declines, the Tide Shifts to Greater Investment Overseas

The recent and long-awaited decline of the dollar is sparking a surge of American investment in foreign stocks and bonds, as well as in the stocks of U.S. manufacturing and high-technology companies that stand to benefit from a falling dollar.

Many mutual funds that specialize in international investments report strong growth in assets in recent weeks, while pension and trust managers say they are boosting assets invested overseas.

But the dollar’s dip also appears to be triggering a slowdown in the growth of foreign investment in the United States, some economists and bankers say--a prospect that could make it harder for the federal government to finance its huge budget deficit.

While foreign investors don’t appear to be pulling their money out of the United States, they are increasingly investing new monies in overseas markets, experts say.

“New (foreign) investment money may be diversifying, whereas a year ago it all may have moved into the United States,” says Laurie Hacking, a Bank of America vice president and manager of its Los Angeles foreign-exchange trading center.

Dependent on Dollar

Whether these trends continue will depend largely on whether the dollar continues to slide. Although the dollar may fluctuate and even rise a bit in the short run, many economists and portfolio managers expect the U.S. currency to decline further over the longer term.

The Federal Reserve Bank’s index of the dollar’s value against a basket of 10 key foreign currencies, weighted according to the trade their nations do with the United States, had dropped more than 19% by last week from its high in February, to 137.98 from 164.72.

“This is just the tip of the iceberg,” says Allen Sinai, chief economist for the Wall Street investment house of Shearson Lehman Bros., of the dollar’s decline. He suggests that foreigners may have finally accepted psychologically that the dollar is falling, which could trigger even further declines as they reduce their investments here.

To be sure, interest in foreign investing among Americans has been burgeoning at least since 1983, when gross transactions by U.S. investors of foreign stocks doubled to $30.1 billion from the previous year and purchases exceeded sales by a record $3.8 billion. The number of mutual funds specializing in foreign investments has risen to more than 40 from nine in 1980.

The interest has grown in part because of strong performance by foreign stock markets. Only once between 1977 and 1984 has the U.S. stock market ranked among the top five worldwide in overall returns, says Jonathan Custance Baker, international project development director for a group of international mutual funds managed by San Francisco-based G. T. Capital Management Inc.

However, because of the rising dollar in recent years, U.S. investors often lost part of their gains when they converted their foreign investments, denominated in foreign currencies, into dollars.

Now, aided by the tumble of the dollar from its peak in February, interest in overseas investing has accelerated, many experts say.

U.S. investors bought $1.9 billion more in foreign stocks than they sold in the first quarter of this year, a new quarterly record, according to the Securities Industry Assn. Many analysts expect the number to grow.

Institutions Shift

While many individual investors have chosen to invest overseas through international mutual funds, the bulk of overseas investing has been though pension funds and other institutional portfolios.

L. Sherman Telleen, a managing director in the Los Angeles office of the investment firm of Scudder Stevens & Clark, says the firm now advises clients to have as much as 20% of growth-oriented stock portfolios in foreign securities, compared to about 10% a year ago.

No wonder, as many foreign investments have significantly outperformed their U.S. counterparts in recent weeks.

As of last Wednesday, for example, the Hong Kong stock market was up 37.6% so far this year, while the German market was up 29.9%, compared to a 15% rise for the U.S. market, according to Capital International, a Geneva-based research organization. The German market looks even better with the additional benefit of a 7% gain by the German mark against the dollar in that period.

(The Hong Kong market is tied to the U.S. dollar and thus there are no currency translation effects.)

The British market is up only 2.1%, but the British pound is up more than 20% against the dollar during that period. “So even with a lousy market, you’ve made more than 20%,” says George Noble, portfolio manager for the Fidelity Overseas Fund, the international mutual fund offered by Fidelity Investments Corp. of Boston.

“Even if the stock did nothing, with a weaker dollar you would enjoy gains from the currency translation,” Noble says.

Outperformed Others

Consequently, international mutual funds have outperformed many other mutual funds in recent weeks, after lagging during the first part of year when the dollar was still rising, reports A. Michael Lipper, president of Lipper Analytical Services, which tracks mutual fund performance.

Mutual fund portfolio managers say they are investing in stocks of foreign firms which are not dependent on exports, because the lower dollar makes exports to the United States relatively more expensive and thus harder to sell.

Gavin Dobson, portfolio strategist for the Kemper International Fund, offered by Kemper Financial Services of Chicago, says his fund includes stocks of Japanese utilities, supermarket chains and real estate firms, and German and Swiss banks.

He and other strategists say they are high on foreign banks because these institutions will benefit from expected drops in foreign interest rates and from foreigners keeping a greater portion of their deposits overseas.

Bonds denominated in European currencies also have been popular, partly because of favorable currency translations and expected lower interest rates (which raise prices of existing bonds).

The dollar decline has also helped stocks of U.S. firms that were battered by imports made cheaper by the rising dollar.

U.S. Stocks Benefit

Wall Street analysts note that in recent weeks, import-sensitive stocks in such industries as metals, textiles and computers have outperformed stocks of consumer-oriented firms such as retailers and interest-sensitive firms such as financial institutions, which generally had outperformed the market earlier in the year.

“It’s a major change in market leadership,” says John D. Connolly, co-chairman of the investment policy committee of the Wall Street firm of Dean Witter Reynolds.

In the four weeks ended July 24, Connolly notes, copper stocks overall rose 13.3%, steel was up 9.2%, apparel manufacturers 11.6%, textile stocks 9.9% and semiconductor stocks 8.3%. By contrast, Standard & Poor’s composite index of 500 stocks rose 2.4%, while savings and loan association issues fell 6.3%, retail stocks dipped 4.9% and food companies 1.9%.

Stocks of many U.S. multinationals with a high portion of their earnings from overseas operations also have done well, notes Anne E. Gregory, publisher of the Merrill Lynch Market Letter, a stock-market newsletter.

On May 6, the newsletter recommended 27 stocks with high proportions of overseas operations, including Caterpillar Tractor, Dow Chemical, Gillette and NCR. Those stocks since then have collectively risen about 14.1%, compared to 7.9% for the Dow Jones index of 30 industrial stocks, Gregory says.

Contributes to Slowdown

However, the declining dollar, while benefitting many U.S. firms, could be contributing to an apparent slowdown in the growth of foreign investment in the United States. Also contributing to this trend are falling U.S. interest rates, which have declined faster than overseas rates, and steps by West Germany and Japan to make it easier for foreigners to invest in their capital markets.

By some measures, foreign investment in the United States has already begun slowing. Foreign acquisitions of U.S. Treasury securities diminished sharply in this year’s first quarter, with net purchases of only $237 million compared to $12.6 billion in the fourth quarter of 1984, according to the Securities Industry Assn.

Foreigners also have been net sellers of U.S. stocks, with $4.4 billion of net sales in American equities in 1984, the first year they have been net sellers since 1968, when foreign investors became a major factor in the U.S. equity market, the securities trade group says. The trend continued in this year’s first quarter, with net sales of slightly more than $1 billion.