Foreigners invest in US, but not in stocks

Wall Street took a wait-and-see attitude to the newfound unity within the Democratic Party last week, as Gov. Michael Dukakis of Massachusetts was officially sent forth to do battle with Republican Vice-President George Bush. The equities market chugged along in its recent ``ho hum'' trading pattern, although high-technology stocks, often a bellwether for the entire market, had an especially difficult week following several lackluster earnings reports.

Nor are American investors alone in their caution. In the early part of this year, overseas investors seemed downright stingy about committing money to stocks and bonds, especially corporate bonds.

Overseas investors were still reeling from October's market plunge. They had seen large price declines in US bonds and were facing currency losses from depreciation of the dollar.

But they show no such caution about direct investments in the United States. At least in the early part of this year, spending by foreigners to buy or set up businesses in the US has been booming.

During the first quarter of 1988, says John Lonski, senior economist with Moody's Bond Survey, foreign direct investment reached a record $54.6 billion. Much of this, he says, involved takeovers of US businesses, with overseas companies favoring US companies with known brand names, advanced technologies, or established distribution networks.

Some analysts expect this trend to continue, in part because of the strong Democratic ticket, as well as that party's wariness of mergers and takeovers and its commitment to revitalize the domestic US industrial base. That trend, moreover, could be given a boost by the nomination of Mr. Bush, since he has said he will not be a clone of President Reagan on governmental policies.

``To the extent that foreign investors and companies fear that some type of entry into the United States might be more difficult after next year, following this presidential election, there might be an acceleration of takeovers and mergers during the immediate period ahead,'' Mr. Lonski says.

By contrast, he says, foreign investors have been cautious toward US equities. They added $4.1 billion stocks to their portfolios during the first quarter, after selling at an annual rate of $33.8 billion in the fourth quarter of 1987. Foreigners also bought only $1.5 billion of US corporate bonds in the first quarter, down from $10.5 billion in the prior quarter. Lonski believes this pattern may continue and - partly because of the election - accelerate.

This pattern, he says, would be similar to the surge in takeover activity at the end of 1986, before the new tax law took effect the next year. Then, he says, investors ``were seeking to take advantage of more favorable tax laws.''

At the same time, Lonski notes, some US corporations may be more open to the possibility of overseas companies stepping in as white knights during hostile takeover battles with other US businesses.

Case in point: Polaroid. There was speculation last week that Japan's Fuji or West Germany's Agfa-Gevaert might be asked to enter the bidding, to ward off an unsought takeover effort by Roy Disney's Shamrock Holdings Inc.

Last week, partly because of investors' concerns about higher interest rates, the stock market tended to wobble up and down in generally stodgy trading. For the week ending July 22, the Dow Jones industrial average closed down 68.46 points, at 2,060.99.

What if, as Lonski suggests, foreign direct investment does climb in the next year or so? What effect will that have on the market - and individual companies?

``That makes our case all the stronger,'' says Christine Lisec-Pinto, a vice-president of Merrill Lynch & Co. In her somewhat bearish case, Ms. Lisec-Pinto argues that, because industrial commodity prices may be peaking, people should be investing more heavily in bonds and balanced accounts.

Any large-scale direct investment by foreigners, she says, ``would merely bring more industrial capacity on line,'' which works against higher earnings for many companies.

In late April, Merrill Lynch altered its asset allocation guidelines. Cash stayed the same, at 15 percent; but stocks moved down from 45 percent to 40 percent, while bonds moved up from 40 to 45 percent.

Not all investment houses remain as suspicious of equities, nor favorable toward cash holdings. For an averaged balanced fund, Dean Witter has 55 percent in equities, 35 percent in bonds, and 10 percent in cash. In a recent report, John Connolly, Dean Witter's senior vice-president, says that ``a defensive stance emphasizing excess cash is a hangover from the crash, and it hinders performance.''

Dean Witter's market sector weightings emphasize industrial stocks.

``The stock market is modestly overvalued; the bond market is not,'' says Raymond Worseck, investment-strategy coordinator with A.G. Edwards & Sons of St. Louis.

Any heavy influx of direct investment from abroad during the months ahead, says Mr. Worseck, may momentarily ``cause a running away of the market.''

But ultimately, he adds, ``the fundamentals of the market will play out.''

Worseck does not think any particular sectors of the economy look especially strong, although he says there are a number of individual companies in some sectors that look promising. Those sectors, he says, include retailing, insurance, regional telephone companies, and pharmaceutical companies.

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