Foreign Stocks Still Waiting on Interest Rates
Making money in foreign stocks was no easy feat last year, and this year is already looking just as dicey. No wonder a lot of American investors are staying home.
On the plus side, a surprise interest rate cut in Britain sent the Financial Times-100 index rocketing 63.8 points, or 2.3%, to 2,835.70 on Tuesday. And in Japan, rumors of a rate cut boosted the Nikkei stock index 553.73 points, or 3.4%, to 17,063.41 on Thursday.
But in Mexico, mounting fears of higher interest rates slammed the Bolsa index Wednesday and Thursday for a two-day loss of 98.47 points, or 5.5%. In Hong Kong, meanwhile, another round of name calling between Britain and China pushed the ever-volatile Hang Seng index down 135.39 points, or 2.3%, to 5,804.50 on Thursday.
For most foreign markets, interest rates remain the key to the ’93 outlook. Many global money managers figure that Europe, Japan and perhaps even Mexico are roughly where the United States was two years ago: desperately in need of lower interest rates to recharge their economies and their stock markets.
But there is, increasingly, also a feeling among U.S.-based global managers that lower rates alone won’t be enough to spark raging stock rallies in key markets anytime soon. With the added depressant of a continuing strong dollar (which mutes foreign-stock gains for U.S. investors), many Wall Streeters believe that the better returns probably will be in U.S. stocks this year.
“I think dollar-denominated assets are going to be the place to be for quite a while,” says Rod Linafelter, a money manager with Berger Associates’ mutual funds in Denver.
The outlook for major foreign markets:
* EUROPE: With its latest cut, Britain has reduced short-term interest rates to 15-year lows. But its economy remains in sad shape, and the rest of Europe is headed down the same path.
The big problem is Germany--still. Fighting inflation and high wage demands that have followed unification, the Germans refuse to make substantial cuts in their high interest rates. That stance is pushing the nation into recession and dragging the rest of Europe down too, because Germany is by far Europe’s dominant economy.
Though Britain, Italy, Sweden and other key nations have cut interest rates on their own since fall--painfully devaluing their currencies--money pros figure there can’t be a genuine European economic rebound until the Germans relent. But there’s no sign of that, which is why many investors are in no hurry to buy European stocks.
Ironically, when German rates do begin to fall--perhaps by mid-summer--many pros say the best stock plays won’t be in that nation, but rather in the structurally healthier economies of its neighbors, where business should rebound faster.
“We’re more willing to play the (eventual) German rate cut outside of Germany,” specifically in France, the Netherlands, Scandinavia and Spain, says Michael Gerding, head of the Founders Worldwide Growth stock fund in Denver.
* JAPAN: A cut in Japanese interest rates is “long overdue,” says Malcolm Clinger, investment strategist at Swiss Bank Corp. in New York. But don’t be fooled into thinking that lower rates can repair the badly wounded Japanese economy--or the Tokyo stock market--in short order, he warns.
What worries Clinger most is that lower rates may be too late to save some of Japan’s big banks, which are hiding huge losses on real estate loans. “I think it’ll be spring before we find out how severe the damage has been to the Japanese economy and particularly how bad the real estate losses will be,” he says. “It could be bloody” by the time Japan’s fiscal year ends on March 31, he adds.
Richard King, manager of the Warburg Pincus International Equity stock fund in New York, agrees that there’s little hope of the Japanese stock market embarking on a bull run anytime soon. “Even if prices rebound somewhat, they then could sit there for a long time waiting for corporate earnings to come back,” he says.
Given the overcapacity in many Japanese industries, the country could be on the verge of a wave of U.S.-style corporate restructurings that could keep profits depressed until 1994 at the earliest, King says.
* MEXICO: A moderate rise in short-term Mexican interest rates in recent days has spooked many traders, pros say. The rate rise appears to reflect rumors that Mexico’s trade deficit for 1992 will top earlier estimates of $17 billion. A ballooning deficit could depress the peso, forcing the government to raise rates in defense of the currency--ultimately leading to a slower economy.
Another rumor has it that large blocks of Telmex, the phone monopoly and the bellwether Mexican stock, are about to be dumped on the market.
But Susan Gilbertson, analyst at Mexican-stock specialist D.A. Campbell Co. in Santa Monica, believes that the market’s real problem is simply the memory of the surprise 20% mid-year ’92 plunge. “Everybody’s afraid of a repeat of (that),” she says, so trigger fingers are itchy.
Gilbertson doesn’t see the rate rise amounting to much, and figures the trade deficit should ultimately be viewed as a byproduct of a healthy economy. But she admits that the rumor-ridden stock market looks unstable short-term. “We could go down another 5% from here,” she says.
Going Their Own Way
World stock markets are off to a mixed start this year, as economies around the globe continue to diverge. Trends in key markets:
1992 Thurs. Pct. Country/index close close chng. Hong Kong/Hang Seng 5,512.39 5,804.50 +5.3% Singapore/S.T. 1,524.40 1,598.23 +4.8% Germany/DAX-30 1,545.05 1,567.84 +1.5% Japan/Nikkei 16,924.95 17,063.41 +0.8% U.S./Dow 30 3,301.11 3,306.25 nil Britain/FTSE-100 2,846.50 2,816.90 -1.0% Canada/TSE-300 3,350.44 3,307.92 -1.3% France/CAC-40 1,857.78 1,780.64 -4.1% Mexico/Bolsa-40 1,759.44 1,680.83 -4.5%
