Spat Over Trade Could Be Bullish for World Stocks
In the afterglow of NAFTA and GATT, the last problem investors expected in 1994 was a trade war. But if we’re to believe the rhetoric, a war is in fact brewing between America and Japan.
The knee-jerk reaction is to view the breakdown of trade talks between the two giants as inherently negative for stocks worldwide. After all, if the United States slaps sanctions on Japan, the Japanese could follow suit. If the retaliation escalates, the level of trade affected could balloon, pulling other nations into the fray and leading to a breakdown of global commerce.
Thus, if GATT was bullish for world stock markets, wouldn’t a trade war be bearish?
It would--except that it isn’t likely to happen. And in the context of stock markets, the surprise could be that this trade spat is bullish for most--especially the U.S. market.
First, why doubt that the U.S.-Japan fight will mushroom? That too much is at stake is obvious. President Clinton, who risked considerable political capital in the battles for the North American Free Trade Agreement and the global General Agreement on Tariffs and Trade last fall, certainly understands the folly of a trade war.
Some Wall Streeters even suggest that the level of discord between Clinton and Japanese Prime Minister Morihiro Hosokawa last Friday, when their talks collapsed, was staged. “Why bring the prime minister all the way to Washington for nothing?” asked Steven Nagourney, global stock strategist at Lehman Bros. in New York.
The conspiracy theory actually isn’t such a stretch: Just assume that Clinton’s vehement response to Japan’s unwillingness to set trade goals for key markets is meant to heat up the debate over what Japanese consumers pay for goods (i.e., that they pay too much). If the outcome is that Japan’s rigid bureaucrats are further discredited with the people, Hosokawa the reformer could emerge the hero, with some compromise trade plan that finally starts serious economic reform.
It’s also important to remember what the United States is fighting for. The conflict appears to be the United States versus Japan, but in fact, the war is being waged as well on behalf of the Europeans and the Latin Americans, who want greater access to Japan’s sheltered markets.
What does this ultimately have to do with stock prices? If free trade, or at least freer trade, gives consumers everywhere access to the least-expensive, highest-quality products, then the odds of continuing global economic growth improve substantially. The efficient producers will be rewarded, which means that companies (and countries) will have strong incentives to continue to invest in their physical plant and in their people.
Stock markets naturally respond well to the promise of efficiency and growth; they abhor mismanagement and stagnancy.
Indeed, when bearish investors ask why U.S. stock prices are so high, the bulls have a good answer: The market senses the dramatic changes in our economy over the past 10 years, and the potential for surprising corporate profit growth in the ‘90s because of those changes.
What we may have, in fact, is a virtual reversal of roles between America and Japan from 10 years ago, says Tom Robinson, international investment strategist at Merrill Lynch & Co. in New York.
A decade ago, Japan was the low-cost manufacturer with an undervalued currency and seemingly limitless access to cheap capital. Today, Robinson notes, that much more accurately describes America--after years of extraordinarily painful corporate restructurings and the Federal Reserve’s oft-criticized efforts to wring inflation from our system.
If the role reversal goes ditto for the stock markets of the United States and Japan, it’s not hard to see the possibilities. U.S. stocks could be in the midst of a far longer bull run than many investors now imagine. And Japanese stocks could remain mired in their trading-range-type bear market of the past two years, as Japanese companies finally restructure to compete in the changed economic order abroad and at home.
Lehman’s Nagourney, who regularly compares the fundamentals of 20 world stock markets to identify the most and least desirable ones for new investment, says U.S. stocks have jumped to eighth place in his rankings, from 18th three months ago. That is partly a factor of the sharp rise in many foreign markets in the fourth quarter, which effectively raised their risk levels.
In any case, Nagourney says, if you believe the U.S.-Japan trade skirmish implies something positive, rather than negative for the world economy in the year ahead, U.S. stocks in particular could be poised to perform much better than the bears would have us believe.
Rating World Markets Lehman Bros. analyst Steven Nagourney rates 20 world stock markets by their earnings and price momentum, value (such as stock price versus book value) and earnings growth. Here are the top 10 markets overall now, and their rankings in each of the three categories:
Market Momentum Value Growth Overall Sweden 1 11 5 1 Switzerland 7 10 2 2 Australia 3 5 13 3 Denmark 6 12 4 4 Britain 13 9 3 5 Ireland 2 16 10 6 Hong Kong 12 15 1 7 U.S. 8 13 9 8 Netherlands 4 18 8 9 Canada 16 2 12 10
Source: Lehman Bros.
