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December 08, 1997 12:00 AM

ASIAN TURMOIL SPAWNS MANY THEORIES

Paul G. Barr
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    Turmoil in global investment markets has led to an abundance of interpretations of what happened and predictions about what will happen, according to reports produced by investment firms.

    Executives in the market-driven strategies group of Morgan Stanley Dean Witter Discover & Co., New York, expect the Asian financial crisis to lead to earnings-estimate reductions for companies that export significantly to Asia. As a result, executives there created a group of stocks called the Domestic Nifty 50. All 50 companies:

    *Derive 75% or more of revenue and/or operating profit from the United States and Canada;

    *Carry a market capitalization of at least $2 billion;

    *Are rated "strong buy" or "outperform" by Morgan Stanley; and

    *Are likely to have earnings estimates raised.

    On a valuation basis, the group is similar to the Standard & Poor's 500 Stock Index, but the domestic group carries a slightly higher long-term growth rate.

    The strategies group suggests that as earnings of companies begin to be affected by the Asian crisis, investors take a long position in the Domestic Nifty 50 combined with a short position in Morgan Stanley's Multinational Index, which is made up of 50 U.S. companies that derive much of their revenues from outside the United States.

    Morgan Stanley says the strategy can be executed through a swap or program trade.

    But Patrick M. Smith, portfolio manager for the Pioneer Europe Fund, says European companies overall have less exposure to Asia than do American companies.

    He says one of the reasons he's bullish on Europe is that a movement in Europe toward pension privatization will expand inflows into the equity markets and boost stock markets.

    One way to profit directly from the trend would be to buy banks or insurers building asset management capabilities. He says the Pioneer Fund owns Banca Fideuram SpA., an Italian bank that sells mutual funds.

    But selected European companies have felt the heat, particularly those that sell luxury goods, Mr. Smith states in a question-and-answer session released by Pioneer Funds Distributor Inc., Boston, according to a transcript.

    Wright Investors' Service, Bridgeport, Conn., is not bullish on the near-term outlook for U.S. stocks in its Nov. 5 Current Investment Environment newsletter.

    The newsletter states, "single-digit returns are about the best one should expect in the near term."

    Wright questions whether there indeed was a stock market correction in October: "True market corrections have two dimensions: magnitude and duration. Market declines that come and go in the blink of an eye -- before economic fundamentals have had a chance to improve -- cannot be said to have corrected anything."

    Wright notes that if the Dow Jones industrial average's 550-point decline was a result of overvaluation, "the period of market weakness is not over."

    The price-earnings ratio on the S&P 500 hasn't changed much following the market's comeback, according to Wright.

    But Wright says if stocks aren't overvalued and there are no fundamental problems on the horizon, then perhaps the market break was a panic.

    "That in itself should be troubling for equity investors," the newsletter states.

    But underneath all of the market volatility, fundamentals for the U.S. stock and bond markets appear sound, Wright states. "U.S. economic growth remains solid and inflation keeps getting lower," it says.

    Conversely, a number of managers believe U.S. stock market fundamentals are intact.

    Executives at The Chicago Trust Co., Chicago, viewed the 10% correction in U.S. stock prices to be "healthy," but not a disruption to the bull market, says its Investment Thinking market update.

    The bull market is still intact for the following reasons, according to Chicago Trust:

    *The economy is strong and is expected to continue growing through 1998;

    *Corporate profits will expand;

    *Money flows into mutual funds will continue;

    *Interest rates will remain low; and

    *Inflation remains a non-event.

    "It is not unusual to have 10% corrections in stock market prices" annually or every other year, the November issue of Investment Thinking says.

    Once the market, as measured by the Dow Jones industrial average, moves up through 7,600, "we could see new highs, perhaps by year-end," Chicago Trust managers believe.

    Likewise, C. Frazier Evans, senior economist for Colonial Management Associates Inc., Boston, believes the underlying fundamental prospects for the U.S. stock market remain sound, says the November issue of Viewpoint.

    "The environment for equities remains positive," Mr. Evans wrote.

    But given that stock prices remain relatively high on a valuation basis, he wrote, "It seems reasonable to expect future market action to be more in line with the rate of earnings progress."

    American Express Asset Management Group Inc., Minneapolis, continues to be fully invested in its portfolios.

    It does so on the belief that "the favorable economic environment will continue through next year and demand for U.S. domestic equities remains strong on a secular and cyclical basis," writes Mike Wolf, executive vice president, in a letter to Pensions & Investments. "Simply put, there appear to be more buyers than sellers of U.S. equities."

    Baby boomers, corporations and foreign investors are all in positions to continue buying stock, Mr. Wolf writes.

    John Cleland, chief investment strategist for Security Benefit Group of Cos., Topeka, Kan., sees no "real change" in market fundamentals, which continue to be positive, he writes in a letter to P&I.

    He believes that Asia's problems are likely to temper growth enough to remove a need for a hike in short-term interest rates by the U.S. Federal Reserve.

    "The recent market volatility should be viewed with only mild interest as the global economic fundamentals and the geo-political landscape continue today to be powerfully positive for investors with long-term investment horizons," he says in the letter.

    Portfolio managers at Currency Management Inc., Rockville, Md., view the Japanese stock market as vulnerable to further declines, says the company's November 1997 Monthly Market Overview.

    Currency Management executives believe the weakness in the Nikkei stock index will result in a much weaker Japanese yen relative to the U.S. dollar. The firm anticipates trade at between 130 and 150 yen to the dollar during the first quarter of 1998.

    Argus Research Corp., New York, urges readers of its Weekly Staff Report to remember the individual investors, who still control 48% of the stock market through direct ownership.

    A recent survey indicated that stock corrections won't change individuals' investment strategies, Argus writes.

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