Skip the Madness of Crowds and Look Beyond the Crisis
If you can keep your head when all about you are losing theirs, maybe you’re smarter than they are.
World stock markets, fearing the outbreak of a shooting war in the Persian Gulf, dove for cover last week. Investors dumped stocks to raise cash in case a war damaged or destroyed the oil fields in Kuwait, Iraq and Saudi Arabia, cutting off oil and causing a worldwide depression. Prices sank to the lowest levels of the year--or of several years--in Frankfurt, Tokyo and London. In the United States, prices fell relentlessly for stocks of big companies on the New York Stock Exchange and smaller firms traded over the counter.
The reactions at home and abroad affected U.S. investors, who have been heavy buyers of international mutual funds this year and now have more than $60 billion in short-term money-market and long-term stock funds overseas.
But the “worst-case scenario” may not be the correct one, says Harry Rosenthal, vice president of Deutsche Bank Capital, the investment subsidiary of Germany’s largest bank. “Financial types overreact.”
Cooler heads might look beyond market emotions to economic realities and conclude that--just as after the stock market crash of October, 1987--there is more reason to hold on to mutual funds and other investments than to sell.
You have to start from the assumption that the oil fields won’t be destroyed--either because U.S. air power is so overwhelming that it will prevent damage, or because the current crisis can be resolved by an Iraqi withdrawal from Kuwait, with no harm to the fields. Then a realistic appraisal of the world’s economies is possible.
The outlook for Europe was good before the Persian Gulf crisis and hasn’t changed that much. Sure, if oil prices stay high--$25 a barrel or so--after the crisis, that will slow Europe’s economies a bit and further retard the rebuilding of Eastern Europe.
But companies in Europe, particularly in Germany, are in the fortunate position of having spare capital. “Siemens, Mannesman--they have the cash and can make investments,” says Deutsche Bank’s Rosenthal.
And Europe has laid the groundwork, literally, for economic growth by investing since 1987 in new roads and high-speed railroads, in telephone systems and other public betterments, says Penelope Dobkin, manager of Fidelity Investments’ Europe Fund. Thus, the ancient economies of the Old World now have the infrastructure to support growth of more than 5% a year.
In Japan, the stock market fell to its lowest point in almost three years as investors feared that the nation--which imports all its energy--would suffer most from disruptions in oil. But such thinking may be out of date, suggests Martin Wade, president of Rowe Price Fleming International, a venture of the T. Rowe Price mutual fund group. In the past decade, even as its economy grew rapidly, Japan reduced its use of oil from 4.4 million barrels a day to 3.5 million. “Oil imports amount to only 1.5% of gross national product now,” notes Wade, “down from 5.5% 10 years ago.” So Japan’s economy should continue to prosper.
All that is good news for the United States, of course, because the health of our trading partners is important for an economy that depends increasingly on export sales. Europe takes 25% of U.S. exports, Japan another 10%, and the latest trade figures show brisk increases in exports just because those economies are thriving.
To be sure, all is not sunshine in the world economy. In Japan, the stock market was weak before the Gulf crisis because inflation was heating up and the Bank of Japan was concerned about real estate debt, notes economist David Resler of Nomura Securities.
Eastern Europe, including East Germany, has deeper problems than energy. The East Bloc must work out questions as basic as legal land ownership before Western business will invest at all. It will take much longer, 10 years perhaps, and cost much more for Eastern Europe to rebuild than was thought last year when the Berlin Wall came down.
Finally, the U.S. economy appeared to be stumbling into recession even before the Gulf crisis.
But Japanese inflation, East European disarray and U.S. economic weakness were all amply discounted by recent stock market declines.
What the markets haven’t allowed for is the probable aftermath of success. If, as expected, the U.S.-led multinational force turns back Iraqi aggression, the result could be an impressive upsurge of confidence in the ability of the world community to act cooperatively and in the world leadership of the United States.
It should be a time for dedication, not gloating. If the United States could gather support and mount a force to counter aggression in two weeks, countering its own economic, social and educational problems should not be beyond us. Bankers have a saying: “Capital is confidence.” They mean if the confidence in your abilities is there, the money to accomplish your goals will be there, too.
