Foreign Markets Follow U.S. Down

By CAROL J. WILLIAMS, MARK MAGNIER and CHRIS KRAUL

July 23, 2002 12 AM PT

TIMES STAFF WRITERS

BERLIN —

When Wall Street sneezes, the rest of the world gets a cold, but so far it has not been a case of pneumonia.

With U.S. markets being pounded in recent weeks, foreign markets have been playing follow-the-leader. On Monday, as major U.S. indexes fell about 3%, stocks also slid around the globe. European losses ran about 5%, and Brazil was down 6.5%.

Asian markets fell Monday in advance of Wall Street’s opening. But today, many Far Eastern markets were rallying early on, retaining their relative leadership role this year.

In Tokyo, the Nikkei-225 index was up 0.5% in early trading; South Korea’s main index was up 0.4%.

Although foreign markets often take their cue from Wall Street, local issues can be more important in determining share price trends.

The optimism buoying many Asian markets this year is based on growing trade lifting all economic boats. Meanwhile, in Latin America, many investors are queasy about debt levels, principally in Argentina, which has defaulted, and in Brazil, which some economists think may follow suit.

In Europe, the strengthening euro is expected to help the region’s stock markets in the long run, though it hasn’t halted steep declines this year. For U.S. investors in Europe and elsewhere, however, the dollar’s weakness has helped cushion foreign market losses this year.

Fears of economic weakness and a distrust of reported earnings by corporations fed the case of nerves of an already jittery European trading community Monday, sending many stocks to multiyear lows.

But in Frankfurt, Deutsche Bank analyst Bernd Meyer was more philosophical than frantic.

“We’ve been in a downturn for a couple of years now,” he said, noting that conservative earnings forecasts by major companies have presented more positive surprises to shareholders than the kind of unpleasant shock associated with WorldCom Inc.

He said he expects a continued bumpy ride on the continent while U.S. markets respond to the corporate management scandals roiling the economy. “Europe will react as strongly whether the trend is up or down.”

Summer market trends tend to be exaggerated because many Europeans are on vacation and they pay less attention to their portfolios than they do during the rest of the year, Meyer said.

Amid the gloom, however, some analysts around the world have begun advising clients that stocks may be undervalued and therefore a good investment.

“Exports are growing, and we seem to be getting into a better cycle,” said Yoshiide Mukoyoshi, economist with Kokusai Securities in Tokyo. “So for investors, it’s a positive time to buy stocks.”

Asian markets have tended to slavishly follow their much larger U.S. counterpart, but some analysts see signs that this pattern is changing. “Asia is parting ways with the U.S.,” said Jahanzeb Naseer, a Hong Kong-based strategist with HSBC Asia. “It’s a slow process, but it’s happening.”

One reason, they said, is that many Asian industry and equity markets already went through a difficult restructuring after the 1997-98 currency crisis, even as U.S. markets were racing ahead. This leaves them less vulnerable to declines and more resilient on the upside.

Although Asia still has a long way to go before it solves its banking and corporate debt concerns, several countries, led by South Korea and Thailand, are stepping up efforts to tackle the problems, analysts said. And rising markets tend to make people forget the worst of their difficulties, at least temporarily.

Asian nations are benefiting from rising U.S. demand as exporters move more inventory overseas. This is complemented by improved political stability and solid domestic demand in some markets, as countries cut interest rates and ease their monetary policies.

“We’re quite bullish for Asia next year,” said Robert Subbaraman, Asia analyst with Lehman Bros. in Japan. “We think domestic demand will make a full-fledged recovery.”

Japan’s Nikkei index is down 3.4% this year, compared with the 28.6% plunge in the U.S. Standard & Poor’s 500 index.

“Most Asian markets were not down nearly as bad as expected” on Monday. Subbaraman said. “A lot of problems in the U.S. seem to be more U.S.-focused.”

In Latin America, Mexico’s main index fell 3.5%, Argentina’s by 4% and Chile’s by 1.8%.

The greatest damage was in Brazil, where the leading stock index fell 6.5% and bonds weakened on reports that a new poll would show leftist presidential candidate Luis Inacio “Lula” da Silva maintaining his commanding lead in voter preference ahead of the November election.

Wall Street is nervous about a Da Silva victory because he has said that he would consider stopping payment on Brazil’s $400 million in public debt and that he might halt the nation’s practice of privatizing state-owned companies and services.

David Malpass, global economist for Bear, Stearns & Co. New York, said Brazil’s debt load has become more unsupportable in recent weeks as investor nervousness has forced up interest rates, raising the cost of making interest payments.

“Brazil is on the path to a debt default, and that fear is spilling over into other South American countries,” Malpass said. “People are worried that Brazil will get the same treatment that Argentina did” from the International Monetary Fund, a reference to the IMF’s prescription for austerity in lieu of more funds since the currency devaluation in January.

“The investment climate in Latin America at least for the time being will remain negative until we see a rebound in the Dow Jones index,” said Carlos Janada of ABN Amro bank in New York.

“Brazil will remain unstable until the election clears up all this uncertainty,” he said.

(BEGIN TEXT OF INFOBOX)

Bear Tracks

How key global stock markets have fared this year, measured in local currency and U.S. dollars:

YTD change:

Market Local in U.S. $

South Korea +3.9% +17.1%

Japan -3.4 +9.1

Mexico -4.1 -8.9

Singapore -5.4 +0.7

Taiwan -9.2 -3.8

Australia -9.7 -3.2