Global economy nturmoilandexpertsdisagreeonfix

Updated Monday,September21,1998

Saturday15August1998

Ahealthygrowl
Analystsseedownturnasacorrectionforanoverpricedmarket

DONMACDONALD
TheGazette

Hey,what'sthatgrowlingsound?Don'tlooknowbutabig,oldbeariseatingyourlunch...er...yourinvestmentportfolio.

TheTorontoStockExchangecrossedtheborderintobearcountrythisweek.TheTSE300indexcontinueditssummerswoon,falling633pointsfortheweek.Thatputtheindex20-per-centbelowtherecordhighitsetinApril-themarkfrequentlycitedasthesignalofabearmarket.

Indeed,theindexhasconsumedallofitsearliergainsin1998andisnowdown6percentsincethebeginningofJanuary.ThatmakestheTSEtheworst-performingstockexchangeamongtheG7industrializedcountriesthisyear.

IntheU.S.,theDowJonesindustrialaveragehasbeendroppingsharplyforseveralweeks,buttheslidefromthehighreachedonJuly17issofaronlyhalfasbigasToronto'sfall.

ForinvestorswhoseRRSPstatementshavegrownfatoneasydouble-digitreturnsthroughthegreatbullmarketofthe1990s,thismagnitudeofmarketdeclineisasunfamiliarasitisunsettling.

Sohowbadcanitget?Here'saworst-casescenario:

AshockinthealreadycalamitousAsianeconomicsituation-sayadevaluationoftheChinesecurrencyoradebtdefaultbyanothercountryintheregion-triggersareallyseriousmarketcrashinNorthAmerica.

Thatdeclineinstockprices,inturn,drainsconfidencefrominvestorsandbusinessandthrowstheeconomyintorecession.Inresponse,evenmoremoneyistakenoutofthemarket,sendingitintoayears-longdeclinecomparabletothe1930sDepression,the1970sstagflationeraortheJapanesemarketofthe1990s.

Depressingenough?Now,here'stherosyscenario:theeffortsofinternationallendinginstitutionsandlocalgovernmentsbegintopayoffinAsiaandRussia.TheNorthAmericaneconomymakesasoftlandingand,withcorporateprofitsstrengtheningonceagain,thestockmarket-afterahealthy,cleansingcorrection-resumesitsmarcheverhigher.

Stock-marketwatchersinterviewedthisweekdon'tthinkeitherscenarioisverylikely.

"Insteadofabullmarketorabearmarket,wemightbecomingintoaboringmarket,"saidPeterHill,presidentofStandardLifePortfolioManagementLtd.,whichhas$13.4billionundermanagement.

Hilldoesn'tseetheconditionsforalongbearmarket.Butatthesametime,thereappearslittlesupportforastrongrecoveryinstockpriceswiththeAsiancrisisunderminingcorporateprofitsonbothsidesoftheborder.

Thatmightwellleavestockinvestorswithsingle-digitreturnsorperhapssmallnegativenumberforthenextfewyears-"moreofasidewaysthing,spurtsanddisappointments,"asHillputsit.

InCanada,thebigdriverofthemarketinrecentmonthshasbeenfinancial-servicesstocks,butthosesoldofflastweek.Andthere'slittlehopeforaquickrecoveryinthedevastatedresourcessectorwheredepressedcommoditypricesarelinkedtotheseeminglyunendingagonyinAsia.

"Idonotseewherethebigstrengthsaregoingtocomefrom,"Hillsaid."Corporateearningsarenottheretosupportthemarketatveryhighlevels."

Whilethereremainoptimisticprognosticators,conditionsforamarketdeclinehavebeeninplaceforsometime.

ThebullmarketinNorthAmerica,whichmayormaynotbecomingtoanend,isthelongestandmostexuberantinhistory,withsomeanalystsdatingitbackasfarasthesummerof1982.BythetimetheTSE300hadreacheditshighonApril22,ithadreturnedanaverageof22percentayeartoinvestorsoverthepastthreeyearswhiletheDowJonesindustrialshadreturned29percentayearinthesameperiod.

Asaresult,stockswereexpensiveandtherewereclearsignsofaspeculativebubbledevelopingwithrisingsharepricesfuelingever-greateroptimism.

Forexample,thepercentageofhouseholds'investmentportfolios(notincludingpensionplans)devotedtostockshadrisenbythebeginningofthisyearto55percentintheU.S.and40percentinCanada,accordingtotheMontreal-basedBankCreditAnalystResearchGroup.IntheU.S.,thatlevelofstock-marketexposurehasn'tbeenseensincejustbeforethelastbigbearmarketinthe1970s.

Othersignsofspeculativefrothincludethemergermaniasweepingtheeconomyandrecordlevelsofborrowingfrombrokeragehousestofinancestockpurchases.

InthemonthsbeforetheTSE300andtheDowJonesindustrialshittheirrecenthighs,abearmarkethadalreadydevelopedinsmall-capitalizationandresourcestocks.

Andinterestinnewstockissueshasbeenonthewaneformonths,foreshadowinghardtimesforthebrokerageindustry.APriceWaterhouseCooperssurveyofinitialpublicofferingsfounda43.2-per-centdropinthenumberofdealsanda61-per-centdeclineinvalue.

"Marketshavebeenpricedforperfectioninthesenseofcontinuingearningsgrowth,continuedperfecteconomicconditions,"saidMartinBarnes,managingeditorofthe BankCreditAnalyst."Andwe'vegotanythingbutthat.

"There'sbeentoomuchoptimism,particularlyintheU.S.,intermsoftheearningsoutlookandtheAsianeffect."

UndertheweightoftheAsiancrisis,corporate-profitgrowthisexpectedtoslowdramaticallythisyearinCanadatoaround2percentfrom16.2percentin1997,accordingtotheRoyalBankofCanada.

IntheU.S.,it'sunlikelytheeconomywillbeabletosqueezeoutanysignificantprofitgrowththisyear,comparedwithaboutan8-per-centincreaselastyear.

Still,it'snotallbadnews.Long,deepbearmarketsaretypicallyassociatedwithrisinginflation,higherinterestratesandrecession.

Mosteconomistsandanalystspredictthateconomicoutputwillcontinuetogrow,albeitatareducedpace.Sothestock-marketpainmaybeshort-lived,evenifthedaysofdouble-digitreturnsareoverforawhile.

"Let'sgobacktothe'50s,'60sand'80s,"Barnessaid."Therewerelotsofcyclicalcorrectionsoverthosedecadesandtypicallytheywereinthe20-to30-per-centrange.

"Itwasn'ttheendoftheworld.Itwaspainful,butshort-lived,andthenthemarkettendedtogoupagain."

Indeed,Barnesbelievesthedownturnishealthyinamarketthathadbecomedangerouslyoverpriced.

"Ifyoucanlettheairoutoftheballoonslowlybeforeitburstswithabang,that'saloteasiertodealwith."

ProminentQuebecequitystrategistClementGignacagreedthatthedropinstockpriceshasinjectedameasureofrealityintothemarket.

PricesofstocksontheTSE300indexhadincreasedtoanunsustainableratioof27timesper-shareearningsinApril,hesaid.

Priceshavenowfallentoabout23timesearningsandfairvaluewouldbeabout20times."We'reintheback-to-Earthphase.Youwillprobablyhaveabumpyrideandnegativereturnsforthenextsixmonths."

Smallinvestors,steepedinthehold-for-the-long-termphilosophy,don'tappeartobepanickingthusfarinthestock-marketdrop.

TheaverageCanadianequitymutualfundwasdown9.5percentoverthethreemonthsendedJuly31.Butmutual-fundcompaniesreportthatinvestors,forthemostpart,aretakingawait-and-seeattitude.

"Inafallingmarket,peoplearelesslikelytobuymutualfunds,"saidJohnKaszel,researchdirectorattheInvestmentFundsInstituteofCanada."Peopleareholdingontotheirassetsandwaitingforamorestabletimetoinvest."

Globaleconomyinturmoilandexpertsdisagreeonfix

Friday14August1998
APRILLINDGREN
SouthamNews

KATSUMIKASAHARA,AP/TwowomenpasstheheadquartersofTokyo'sLong-TermCreditBankofJapan,whichhaditscreditratingdowngradedbyMoody'sInvestorsServiceonWednesday.Thebank,plaguedwithdebt,wasreportedinJunetobeonthevergeofcollapseafteradowngradeanditssharesbecamealmostworthlessovernight.

YURIKADOBNOV,AFP/TraderssatattheircomputersattheMoscowstockexchangeyesterdayafterthemainindexfellenoughtotriggeratradinghalt.PageF2

Amidgrowingconcernsthattheglobaleconomyisrapidlyunraveling,economistsareatoddsoverwhatgovernmentscandoaboutit.

"Wehaven'twitnessedanythinglikethissincethe'30sintermsofsomanyregionsoftheworldbeinginsuchserioustrouble,"saidMartinBarnes,managingeditoroftheMontreal-basedBankCreditAnalyst,aninfluentialadvisoryserviceforprofessionalinvestors.

"Thisisnotjustatypicalbusinesscyclethatwillrunitscoursefairlyquickly,"hesaidonadaywhenfearsofeconomicchaos-thistimeinRussia-sentworldfinancialmarketsintorenewedturmoil.

Barnesquestionswhethergovernmentshavetheeconomictoolstorespondtotheupheaval.Butothereconomistsbelievemanyindustrializedcountries,atleast,arewell-equippedtomeetthechallenge.

InNewYork,theDowJonesindustrialaveragecloseddown93.47pointsat8459.5.TheTorontoStockExchange300compositeindexcontinueditsroller-coasterweek,closingdown150.13points,or2.3percent,at6345.22.Yesterday'slossesreversedmostofthemodestgainsmadeadayearlier.

"Investorsarevery,verynervousrightnowandtheminuteyougetanynegativenewscomingoutofanywhere,ithasanimpact,"saidMarcLevesque,aneconomistwithTDEconomics.

Yesterday'snegativenewscameoutofRussia,wherefearsofacurrencydevaluationordebtdefaultturnedintopanic.Forthesecondtimeinaweek,tradinginRussianshareswastemporarilyhalted.TheRussiantradingindexclosedata27-monthlow.Theruble,whichhasfallen8percentinthelastyear,continuedtodecline.

RobPalombi,amoney-watcheratStandardandPoor'sMMS,saidtheRussianchaoshurttheCanadiandollar.Tradersdumpedcommodity-linkedcurrenciessuchastheloony,hesaid,becausetheyareworriedRussia'seconomicchaoswillhurtmajorcreditorssuchasGermany'sbanks."ThatwouldundermineEuropeandtheglobaleconomyevenmoreandpushcommoditypricesdownfarther."

Thedollarclosedunchangedfromthedaybeforeat65.82centsU.S.butonlyaftertheBankofCanadaintervenedtorescueitfromalowof65.79.Palombisaidthecentralbank'sintervention-forthesixthdayinarow-wasnotsignificant.

Russia'sfinancesarenearcollapsebecauseofmajorleaksinthetaxcollectionsystem,amassivenationaldebt,slumpingcommoditypricesandashakybankingsystem.

Lookingattheglobaleconomyingeneral,Barnesarguesthatpastworldwiderecessionswereeasiertounderstandandeasiertoresolve.Highoilpricesinthe1970sputtheworldintorecession;theglobaleconomyrecoveredwhenthosepricesdropped.

"WhatwehavenowismuchmorestructuralandmuchmoreseriousÉandthesolutionsarepainful,long-runsolutions."

What'smore,hesaid,"therearesomeveryunusualthingsgoingon"thatmakeitdifficultforgovernmentstorespondtoproblemsthatbeganlastsummerinAsiaandarenowintensifying.

Governmentscanusuallylowerinterestratestostimulatetheeconomy,Barnessaid."ButlookatJapan.They'vehadinterestratesofclosetozeroforacoupleofyearsnowandthey'vebeenstuckineightyearsofstagnationthatisnowturningintoarecession."

Similarly,hearguesthattheU.S.economyisalsounusualinthatinflationisstillminimaldespiteeightyearsofspectaculargrowth.

"Ifwehaveone-per-centinflationintheU.S.withtheeconomygrowingthisstronglywhat'sgoingtohappenwhentheeconomyslows?Thisiswhatmakesdeflationarisk,"hesaysglumly.

"Totalkaboutaglobalrecessionisextreme,butIthinkyouwillseealotmorepeopleworriedaboutthatinsixmonths,"especiallyiftheU.S.economylosessteamandceasestobethegloballocomotive.

JoshuaMendelsohn,chiefeconomistwiththeCanadianImperialBankofCommerce,islesspessimistic.HearguesthatlowinflationinindustrializedcountriessuchastheUnitedStatesandCanadameansgovernmentscanreduceinterestratestooffsettheworstoftheglobaleconomicproblems.

Healsopointsoutthatmanynationalgovernmentsareinamuchstrongerfiscalpositionthantheywerefiveorsixyearsago.Thatgivesthemmoreleewaytoincreasepublicspendingtoboostdomesticeconomies.

Mendelsohnsaid,however,thatmanyoftheeconomieshardesthitbytheAsiancrisishavelong-termproblemstodealwith.

TheJapanese,forexample,areunderpressuretoreducetaxestostimulatedomesticconsumption.ButMendelsohnsaiditwilltaketimeforapprehensiveconsumerstorespondandthegovernmentmustalsoaddressmajorstructuralproblemsinthebankingsector.

Chinaisalsostrugglingtorespondtotheimmediatecrisisandtodotherightthingforitseconomyinthelongerterm,hesaid.

Planstointroducemarketreformshavebeenputoffbecausetheywouldhavecausedmassivejoblosses.Iftheeconomyhadcontinuedtogrowat7or8percent,newjobswouldhaveeasedthepain.ButaslumpinChineseexportsduetoeconomiccollapseintheregionmeansgrowthwillbemorelike6percentthisyear,hepredicted.

AlthoughChineseleadershavepledgednottodevaluetheircurrency,theyhavebeensendingoutmixedmessagesinrecentdays.DevaluationwouldbedisastrousbecauseitwouldsparkanotherroundofcompetitivedevaluationsinAsia.That,inturn,wouldsignalmorechaosintheregion,furtherweakencommoditypricesandhavearippleeffectoncommodityexporterssuchasCanada.

"Ifyouwanttoscareyourself,youcandoit,"Mendelsohnsaid."It'sveryeasyintoday'sworld."

InadditiontodevaluationbytheChinese,MendelsohnandBarnespointedtootherflashpointsthatwouldindicatefurtherdeteriorationintheglobaleconomy.

- ContinuingdeclinesintheCanadianandtheU.S.stockmarket."Agoodpartofconsumerspendingisbeingbolsteredbypeoplefeelingwealthierasaresultofthegainstheyhavemadeinthemarketsinrecentdays,"saysMendelsohn."Ifthedeteriorationcontinues,alloftheseconsumersmaygobackintothebunker"leavingthedomesticeconomiestolanguishalongsidetheexportsector.

- Furtherdeclinesincommodityprices.Iftheykeepfalling,investornervousnessaboutcountriesdependentoncommodityexportswillcontinue.Lowerpriceswillalsoaffectcorporateearningsraisingconcernsaboutmoretroubleinthestockmarkets.

- WeakexportperformancesinAsia.CurrencydevaluationsshouldmakeAsiancountries'exportsmoreaffordable,butBarnespointsoutthatincreasedsalesarebeingoffsetbythelowpricesresultingfromcut-throatcompetition."Thesecountriesneedmoredollarstoservicetheirforeigndebt,"hesays.

- FailureofJapantointroduceeconomicreforms.TheinternationalinvestmentcommunityisalreadyconcernedthatJapan,themajoreconomicgrowthengineinAsia,isn'tcuttingtaxesfastenoughtostimulateitseconomy.TherearealsoconcernsabouttheJapanesegovernment'scommitmenttoseriousreformsofthebankingsector. MartinBarnesinBarron'sMonday,November10,1997 ©1998TheGazette,
adivisionofSouthamInc.

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