Fast-Changing World Offers Interesting Investment Opportunities in ’93

As I revise my investment strategies for 1993, it seems the most interesting areas this year may well be outside the United States. Rapid change always presents opportunities, and change in the global scene is torrid.

Sell short the Japanese stock market . Japan is in deep trouble. Collapses in real estate and stocks in Japan are not just blowing the froth off speculative markets, but instead are indicative of deep economic and financial problems that have much further to go. Furthermore, exports will not fare well in the protectionist environment that is unfolding. The Nikkei average may fall to half its current value.

In short sales, people borrow securities from a broker and sell them, betting that the price will decline so they can buy it back at lower levels, return it to the lender and pocket the difference.

Invest in China . China’s economy is virtually exploding, although to be sure, from a tiny base, and this strong internal growth may well offset some export weakness. I prefer to make investments through Taiwanese companies, since that avoids the current clash between China and Hong Kong over democracy there when the British leave in 1997.

Buy European debt instruments. Economic weakness and diverse problems in recent years have set back the movement toward unity and revealed the deepening recession in all major European countries. Pressure on central banks to cut interest rates makes short-term instruments attractive; falling interest rates, business weakness and low inflation are good news for European bonds.

Buy European stocks. Europe, even with massive easing of credit, will not instantly recover. Nevertheless, European stock markets should revive, driven by declining interest rates and anticipation of economic recovery. France and Germany are particularly attractive.

Buy Mexican stocks. Dynamic growth should continue in Mexico with the ongoing infusion of American capital and technology. The North American Free Trade Agreement seems destined for ratification, despite the protectionism of the Clinton Administration, and it will benefit Mexico.

Buy the dollar or short European currencies and the yen. The U.S. certainly has its share of economic woes, but for the next year or so this country is still the best of a bad lot of major economies. Consequently, the dollar, the globe’s safe haven in a sea of economic, financial, political and military trouble, will continue to rise against other key currencies. (Incidentally, this means that U.S. investors’ investments in Europe must be hedged against a rising greenback.)

Short major industrial commodities, including oil. With subdued growth at best on a worldwide basis and robust productivity growth that pushes up unemployment and limits wage gains, inflation as well as inflation fears should melt this year. In fact, deflation is, in many ways, the order of the day.

Buy natural gas stocks and futures. An exception to general industrial commodity price weakness may be natural gas. The Mt. Pinatubo eruption two years ago in the Philippines appears to have created colder weather in the United States, and environmental concerns have increased the appeal of clean-burning natural gas.

Buy U.S. debt instruments that will rise in price if short-term interest rates remain flat or decline, and buy U.S. bonds . The stop-go American economy is hardly one destined for rising short-term interest rates and, with declining inflation and falling bond yields abroad, U.S. bonds look good.

Buy high-quality U.S. utility stocks . Some years ago, I coined the phrase “stocks that look like bonds” to describe stocks such as high-quality, high-dividend utilities that have the same certainty of yield as bonds and the same sensitivity to declining interest rates. They should do well in the environment we foresee.

Buy small U.S. stocks and short multinationals . Large multinational companies will, in many cases, suffer from the growth of protectionism as well as the recession abroad and a strengthening dollar. At the same time, small U.S. companies that tend to be domestically or at least North American-oriented are relatively free from these difficulties. To be sure, this difference between big multinationals and small, U.S.-oriented firms is not unknown, as recent stock performance reflects. Many small stocks seem considerably overpriced, but the growing gap between multinational and small-stock performance will probably continue on balance.

Buy rental apartments and real estate investment trusts that own them, as well as manufactured housing companies . People now realize that a house is no longer a sure-fire investment. Consequently, younger families will be buying smaller, often factory-built homes or staying in rental apartments longer before they buy homes, if at all. Also, empty-nesters will unload their money pits at a younger age as expectations of appreciation fade, and move into rental apartments.

Buy U.S. rail stocks. Many companies are so effective at cutting costs and retaining the results that on the bottom line they look like growth stocks, even though they lack consistent and rapid sales growth. One such group is railroads, which may do well because of cost cutting even if U.S. domestic business growth is subdued.

Buy productivity enhancers in the telecommunications, office automation and other service sector-related areas. Unfortunately, a company can do a super job of enhancing its productivity only to see the fruits snatched away by domestic or foreign competitors. Consequently, we favor, in the main, companies that produce the hardware and software that help others improve productivity. We specifically like those that aid the service sector with telecommunications and office automation hardware and software.