Exports Fueling the Economy, May Spark Stock Rally
An old story on Wall Street may soon get new attention--and for good reason. It may justify the stock market’s next surge.
The story is that overseas demand for U.S. goods and services continues to mushroom. Export business is so good, in fact, that it helped make up for soft domestic demand in the first quarter for many companies. That kept the slide in first-quarter corporate profits from being a lot worse than it might have been.
“Export certainly has been one of the reasons why the manufacturing economy hasn’t sunk any lower,” said Robert Bretz, who heads the business survey committee of the National Assn. of Purchasing Management.
His group, which tracks the economy by watching supply and demand trends at major companies, said its export index in April was the highest since September.
The continuing export boom may be under-appreciated by a jaded Wall Street. Consider that domestic demand for manufactured goods has been sluggish for about a year as car, housing and appliance sales have weakened. That has been a general drag on the economy.
Meanwhile, exports of heavy equipment and high-tech products to Europe and Asia keep growing, reaching levels that many U.S. companies could only have dreamed about in the early 1980s.
Add it up, and the export strength is a partial answer to the mystery of the economy’s resilience in the face of weak domestic demand.
“This is just what the doctor ordered,” notes David Hale, economist at Kemper Financial Services in Chicago. Remember when, just a few years back, economists warned that flat exports and rising imports threatened to cut the legs out from under the U.S. economy?
In 1987, this country imported $113 billion more than it exported, counting all goods and services. By last year, the deficit was cut to $47 billion.
So the progress is real. And even better, it’s almost certain to continue, even as the dollar remains surprisingly strong--normally a negative for exporters. The simple fact is that the world needs a lot of new nuts-and-bolts-type equipment.
“One of the bullish things about the next two to three years is the capital goods cycle,” Hale said. Overseas and at home, many companies are spending huge amounts of money to modernize their plants or build new ones. Governments, meanwhile, are committed to rebuilding sewer and road systems and to forcing new pollution-control systems on factories. And Eastern Europe will require a major overhaul if it’s to be brought into the world trading system.
The machinery needed for those projects--the air compressors, generators, tractors, computers and other goods--are the forte of U.S. manufacturers. Even if West Germany wanted to keep the entire European market to itself, it couldn’t, notes Lacy Hunt, economist at CM&M; Group in New York. “West German plants already are working at capacity,” he said. And Japan, too, is investing heavily in its own economy, limiting its export capacity.
Hunt believes that another surge in U.S. exports, combined with new vigor in the service economy, will push real U.S. economic growth to an annualized rate of 3% in the current quarter, from 2.1% in the first quarter.
Translation for the stock market: Corporate profits may come in much stronger than expected. And even if interest rates continue to inch higher--the price we pay for an expanding economy--the end of recession worries may give investors new reasons to look at stocks.
Although investors are conditioned to believe that stocks can’t rise if interest rates are rising, it isn’t true. Everything depends on the economic background. Stocks soared in 1983 as the economy rebounded, even though rates were rising as well.
In recent days, stocks such as Deere, Caterpillar, Ingersoll-Rand, Fluor Corp. and Compaq Computer have seen renewed buying. All are major exporters of goods or services. The market may be telling us that, despite the short-term gloom over interest rates, the long-term economic picture looks better, not worse.
Europe’s Not So Bad, Either: Everybody knows Europe will be an exciting investment arena in the 1990s. But the expected economic changes there will undoubtedly produce a lot of losers as well. This is a time for particularly careful stock picking, not rushing wholesale into European markets, says Penelope Dobkin, manager of Fidelity Group’s Europe Fund.
Dobkin has run the Europe Fund since 1986. She has $370 million under management, spread among 90 stocks. Her track record: Up 25.93% in the 12 months ended March 31, compared to 22.37% for the average Europe-focused fund. In the first quarter, Dobkin’s fund gained 1.61%, compared to 0.82% for the average Europe fund. (The average U.S. stock fund lost 2.31%.)
Dobkin says the euphoria over West Germany’s future isn’t a lot of hype. But forget the talk about an avalanche of profits falling on West German companies from Eastern European business ventures. “That’s not going to come before 1995,” she said, especially given the costs of absorbing East Germany into the West.
The reason to buy West German stocks now is that they’re severely undervalued just based on their underlying assets, including land, Dobkin said. U.S. stocks went through an asset-value phase in the late ‘80s. In West Germany, only now are the usually secretive companies beginning to disclose what their assets are worth.
The asset value of West German companies is estimated at about 1 trillion West German marks, Dobkin said. The value of their stocks on the open market, meanwhile, is about half that. Pretty simple math, Dobkin figures. And those asset values are destined to rise, she said, because West German economic growth will be Europe’s locomotive over the next few years.
She has 19% of her fund’s assets invested in West German stocks, the heaviest weighting in any European nation. And she’s sticking with the blue chips--industrial giants such as Siemens and Veba, and big banks such as Deutsche Bank.
“The average European portfolio is overweighted with smaller stocks,” Dobkin said. But she thinks that, while the smaller issues were the success stories of the 1980s, the big names will be the hot stocks of the 1990s. One good reason: “Just look at what the Japanese are buying,” she said. Japanese investors are taken with Europe, and just as they played the blue chip names in the United States in the late ‘80s, they’re looking for the same kind of stocks in West Germany.
After Germany, the heaviest stock weightings in Dobkin’s portfolio are France (13% of assets), Britain (13%), the Netherlands (13%), Switzerland (6%), Spain (5%) and Norway (4%).
She is most worried about Britain. She recently slashed her holdings there (the weighting was 24% on Jan. 1). Dobkin sees great risk of high inflation in Britain leading to a recession later this year. And the market doesn’t reflect the major possibility of a liberal Labor government coming to power by 1992, she said.
THE EXPORT BOOM While the U.S. economy slowed last year, overseas demand for U.S. goods soared--a trend that has continued into 1990, helping support corporate earnings.
Exports of U.S. goods and services in billions of dollars SOURCE: Commerce Department