Equity markets in Japan, Germany and France, are getting picked as possible winners for the coming year by institutional investors.
But some say strong earnings growth in Japan might not be enough to push its market higher. And the outlook is even murkier for emerging markets, where rising U.S. interest rates and a collapse in Mexico's currency have put downward pressure on markets worldwide.
Nonetheless, among emerging markets, some say they look to South Korea, Brazil and China as possible places to put money in 1995. Mexico also is being watched closely, given the recent fall of its stock market and no expected change in economic fundamentals.
"We're still positive on the outlook for Japan," said Mark Beale, director and head of equity investment for WorldInvest Ltd., London. Japan will continue to see improvement in economic fundamentals, Mr. Beale said. At the same time, Japan's big exporters will benefit from a 10% to 15% appreciation in the U.S. dollar vs. the yen, he said.
Likewise, Mark Hays, executive vice president for IDS International Inc., London, said Japan stands out as a good prospect in 1995. Japan should see "quite strong economic growth" riding "on the back of strong earnings growth," he said.
While the U.S. economic cycle is starting to level off, the earnings recovery in Japan is "just starting to come through," Mr. Hays said.
Because money managers for PCM International Inc., Short Hills, N.J., are bottom-up investors, they don't choose countries directly, said Cassandra Hardman, managing director and principal. Nonetheless, its stock-picking process put the firm's highest weightings into Japan, Ms. Hardman said. While the firm's allocation is still less than a benchmark weighting would be, PCM's managers are finding Japanese companies with attractive growth prospects and low price-earnings ratios.
Another stock-picking firm, Brandywine Asset Management, Wilmington, Del., sees value in Japan. Paul R. Lesutis, managing director, said the firm has roughly 30% of assets in Japan, up from about 25% in the middle of the year, because stocks can be found at relatively attractive prices.
Portfolio managers for ICC-Gratry Global Advisors, Cleveland, expect to move 10% of their assets out of cash and into Japan during the first quarter, said Jerome Gratry, managing director. Currently, ICC-Gratry has about a 27% weighting to Japan. Corporate profits should improve while inflation should remain in check, he said.
But not all investors are enamored with Japan's prospects. Nicholas Reitenbach, director of international investments for Pinnacle Associates Ltd., New York, said Japan's "valuations don't match current levels of earnings growth." While earnings are growing on a percentage basis, on an absolute basis they will just be returning to levels seen in 1989 and 1990, he said. Japan's economy has matured to the point where p/e multiples of 50 and 60 are too high, he said.
Similarly, John Chisholm, senior vice president and portfolio manager for Acadian Asset Management, Boston, said "we don't love (Japan's) market," although there ould be some positive earnings growth there.
But Mr. Chisholm said he does expect strong earnings growth from companies in France and Germany, and at more reasonable price levels.
The firm's managers are most attracted to France, where earnings growth could be 40%, and "valuations are pretty appealing," he said. While Germany's growth should be comparable to France's, prices are relatively higher.
Mr. Lesutis of Brandywine also likes Germany and France because of the values he finds in those countries. In Germany, many capital goods companies still offer value because their profits will rise as the world economy recovery picks up steam, he said. He also likes some of the German retail stocks, which, he said, are very depressed because there is a feeling that sales will never pick up again.
France is interesting, he said, because the French market has been hit, and opportunities are developing there. Likewise, the Finnish market is attractive "for the brave" because, except for the telecom company Nokia Group, stocks have performed poorly there.
At WorldInvest, portfolios are slightly underweighted toward Europe as a whole, but within that, are overweighted toward France, Germany, Holland and Belgium, Mr. Beale said. Those countries will outperform the rest of Europe, getting a boost from favorable monetary policies, he said.
PCM's stock-pickers also are finding value in "core" European countries, including France and Germany, Ms. Hardman said. They expect earnings growth from companies in those countries that, combined with previously depressed prices, should produce good returns, she said.
Among lesser developed countries, Ms. Hardman said South Korea's equity market holds some value, while regulatory loosening should also support prices. PCM managers see several companies there that are cheap on a price-to-cash flow basis, she said. In addition, the requirement that non-Korean investors make an "entrustment deposit" has been lifted for this year, allowing better access to that market, she said. The raising of foreign investing limits also will encourage higher prices, she said.
Managers for State Street Global Advisors, Boston, also like prospects for South Korea, said Heydon Traub, managing director. The market trades at an attractive price-book ratio of 1.6, while earnings growth should be greater than 50%.
But Mr. Traub said Brazil's market has even better prospects than South Korea, despite recent growth in its market. Brazil's price-book is just 0.7, while earnings are expected to grow about 30%.
Brazil "had a good run" this year, but "still is cheap," particularly after its recent fall in sympathy with Mexico's market, he said. Moreover, Brazil is running a trade surplus, inflation is falling, and its political situation is more stable than Mexico's, he said. Mr. Beale of WorldInvest said in agreement that Brazil presents some opportunity, given its political stabilization and trade surplus.
Investors haven't abandoned Mexico yet. Mr. Beale of WorldInvest said his firm historically has been overweighted in Mexico, and says that market still has potential, contingent on political changes taking place. The government needs to introduce a workable stabilization package that is supported by Mexico's economic partners, he said.
Managers at Acadian also are "keeping a careful eye" on Mexico. While actually underweighted there, Mr. Chisholm said Acadian would be overweighted at recent market valuations.
"This is a reasonable time to put a little bit of money in Mexico," he said. Long-term prospects for growth in Mexico still are pretty positive, he said.
State Street's Mr. Traub said China's market is another that is attractive given its weak performance in 1994, and its potential for growth. The market was down 40% to 50% last year, putting its price-book ratio around 1.3. While earnings growth in 1995 will be limited by monetary tightening there, long-term growth of 15% is expected, he said.
According to Mr. Lesutis of Brandywine, Italy also is attractive because its market is down and its currency is down - "a great combination" - as a result of the political uncertainty. But it's a big country with a lot of prosperity and a large underground economy. "We think you can make decent money in Italy in 1995," Mr. Lesutis said. Ms. Hardman of PCM said in agreement that Italy has fallen so far that some stocks are a good value.