Who May Gain, Lose if Soviet Crisis Lingers
Within hours of Mikhail S. Gorbachev’s ouster, world financial markets began to sort out the winners and losers of a potentially prolonged crisis in the Soviet Union.
Stocks of defense companies gained, Germany’s currency plummeted and most U.S. Treasury bond interest rates fell, as investors sought safe haven within the borders of the last superpower.
Underlying all of the market turmoil was a fear that the Soviet Union’s problems could send the world economy into another recession--not because of any financial ties to the U.S.S.R., but because of the crisis’ depressive effect on global psychology.
If the Cold War returns in some form, “out goes the peace dividend,” says Madhav Dhar, global stock strategist for Morgan Stanley & Co. in New York.
Here’s a look at the markets’ early line on winners and losers in the crisis:
WINNERS
* The U.S. dollar--and thus many dollar-based investments--seem sure winners if the Soviet Union erupts in civil war. Investors worldwide, and especially in Europe, probably will continue rushing to the dollar because of the safety it affords, experts said Monday.
Indeed, the dollar’s value soared to 1.824 German marks on Monday from 1.764 Friday, as investors abandoned the mark because of Germany’s proximity to the U.S.S.R. The dollar was at just 1.50 marks as recently as Jan. 1.
“Capital is likely to move toward the United States” now, says Edward Yardeni, economist at C. J. Lawrence Inc. in New York.
* American borrowers, both businesses and consumers, also could win, because the global rush for safe haven in Treasury securities could push interest rates dramatically lower. Monday, the rate on three-month T-bills plunged as low as 4.85% from 5.24% Friday, as investors fought to buy.
U.S. interest rates have been declining anyway in recent weeks because of the weak economy. The Federal Reserve’s policy-making committee meets today, and some experts believe that the Fed could act quickly to cut interest rates again to cushion financial market turmoil.
Some economists, however, say investors are doing the Fed’s rate-cutting work for it. “The Fed can be relatively happy with the way things turned out (Monday),” says Michael Casey, international economist at Maria Ramirez Capital Consultants in New York.
* Defense contractors’ stocks were among the relative few that gained or fell only slightly Monday. McDonnell Douglas jumped $2.50 to $51.25, Northrop rose $1.125 to $30.125 and Loral added 50 cents to $43.75.
Shares of such French defense firms as Thomson SA and EBF also rose, bucking a 7.3% drop in the Paris stock market.
Defense companies probably won’t land any big new contracts soon, even if the Cold War returns, analysts say. Nonetheless, investors’ perception of a newly “hostile” U.S.S.R. could reinforce the positive change in sentiment toward defense stocks that began with the Iraq crisis a year ago.
“I believe that a secular change in market psychology toward these stocks is definitely happening, and I think it’ll continue,” says Paul Nisbet, defense analyst at Prudential Securities.
* Domestic-oriented growth stocks could soar anew, after a brief sell-off this week, some experts argue. “With interest rates going down, it’s going to be a real plus for the stock market,” says William Patternotte, research chief at brokerage Alex. Brown & Sons Inc. in Baltimore.
Those companies that are focused on the U.S. market, and whose growth has been stellar even in a slow economy, should attract new money that has become disillusioned with returns elsewhere, Patternotte and others contend. Such fields as health care, financial services and specialty retail are rife with young companies that probably will prosper regardless of what happens overseas, analysts note.
LOSERS
* Foreign stock markets suffered far worse than the U.S. market Monday, and even if they recover today, the risk of a prolonged steep decline looms if Soviet unrest continues. Most foreign markets are much more thinly traded than the U.S. market, which means that they’re subject to deeper declines in panic selling.
At the very least, experts fear that the threat of strife spilling out of the Soviet Union’s borders could put on hold the spending decisions of many businesses and consumers throughout Europe, and possibly in Japan.
That, in turn, could spark another recession in many European countries and push the already-slowing Japanese economy closer to recession.
“If shooting starts, these markets will get taken down again,” even if the U.S. market stabilizes, warns Morgan Stanley’s Dhar.
* The flip side of the argument for domestic-growth companies is that many U.S. multinational and exporting companies could be slammed if the crisis continues.
The soaring dollar will make U.S. companies’ goods more expensive overseas, potentially crimping exports. Lynn Michaelis, economist at lumber giant Weyerhaeuser in Tacoma, Wash., says Japanese demand for his company’s lumber was “very weak” already and that a further decline of confidence in Japan stemming from Soviet unrest will only make things worse for the Japanese building industry.
Even U.S. multinational companies that can avoid serious problems with currency fluctuations still will suffer from the perception that they are being hurt, analysts say. “If the dollar rises further, it’s going to dilute some of the interest in multinational companies” in favor of domestic-oriented firms, says Marshall Acuff, investment strategist at Smith Barney, Harris Upham & Co. in New York.
Snapshots of Key Markets Monday INTEREST RATES
Reflecting a flight to quality by frightened investors, three-month Treasury bill discount rates plunged to 4.85%--lowest in 14 years--then closed at 5.10%, down from 5.24% Friday.
Longer-term rates rose: 30-year T-bond yields inched up to 8.11% from 8.08% Friday, as investors grew reluctant to lock up money.
OIL
September crude futures on New York’s Merc jumped to $23.10 a barrel, but fell back to close up $1.17 at $22.47, highest since Feb. 13.
PRECIOUS METALS
August gold futures in New York rose to $363.20 an ounce but closed at $358.60, up just 60 cents for the day. Traders mulled the idea that the U.S.S.R. might be forced to dump gold reserves to raise funds for food. Silver gained just 1 cent to $4 an ounce.
DOLLAR
Traders fled the German mark: The dollar soared to 1.824 marks in New York from 1.764 Friday. The dollar rose less strongly against other currencies. It closed at 138.15 Japanese yen, up from 137.30.
