Stock Markets Are Looking Good

WESTERN EUROPE AND JAPAN

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BUOYED by economic integration in Europe as Common Market nations prepare for 1992, political liberalization in the East bloc, and generally good economic growth for industrial nations in general, European and major Asian stock markets look promising during the months ahead. Granted, the Paris-based Organization for Economic Cooperation and Development forecasts slower real growth during 1990 for its 24-member countries, about 3 percent, compared with around 3.6 percent this year. But look who is predicted to be out front. The industrial nations of continental Europe are expected to outperform the United States and Britain, the latter two coming in at 2.3 percent and 1.3 percent, respectively, compared with 3.2 percent for West Germany, 3.1 percent for France, and 3.2 percent for Italy. Japan's projected growth rate glows at 4.5 percent.

Thus, it is hardly surprising that investors are turning their attention to overseas markets - especially continental Europe.

A number of international investors, including Japanese life insurance and real estate companies (such as Kumagai Gumi and Kato Kaguku) have recently shifted potential investments away from the US to Europe. Moreover, investment interest in Europe is on the rise in the US. Case in point: Several new or prospective mutual funds are now being targeted at Europe, including the Classic Europe Growth Fund (PaineWebber) and the New Europe Fund (Scudder, Stevens & Clark).

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The long-term investment outlook for Europe looks promising, in part because of the changes now occurring in Eastern Europe, says Mark Hays, senior portfolio manager of IDS International Inc., an investment management company based in London.

``We're feeling particularly bullish about France,'' Mr. Hays says, noting that with relatively high interest rates there, ``you've got the potential for bond yields to fall.'' That tends to work in favor of stocks, Hays notes. ``France also has a very entrepreneurial economy, with a great interest in equities.''

In the case of West Germany, which remains far and away the dominant economy of Western Europe, Hays sees a somewhat more complicated investment situation. On a short-term basis, the West German equities market will probably not turn in robust growth, he says, although it will hold its own. Thus, IDS is maintaining, as opposed to substantially adding to, its portfolio weighting in West Germany. The paramount challenge, he says, will be the high interest rate policy of the Bundesbank, which makes long-term bonds attractive compared to equities. Nor does IDS expect any immediate reduction in interest rates, given the stimulative tax cut scheduled by Bonn for early this year.

But looking toward the end of 1990 and into the '90s, Hays believes that West German companies will profit from the political liberalization now occurring in Eastern Europe.

IDS International in London, Hays says, currently has ``zero'' investment in the United Kingdom, having pulled all of its holding out of that nation for such continental markets as France and Switzerland. But Hays says that he is now looking for investments in the UK, particularly firms that export to the Continent.

``We see a healthy equities market in the UK, with higher than average returns,'' says Randolph Hood, a director with Matrix Capital Management Company in Greenwich, Conn.

Mr. Hood sees some gains for West German and Japanese stock markets. But he anticipates difficulties in both settings. In the case of Japan, he sees some ``steam coming out of that market,'' following its pell-mell growth in recent years, with the Nikkei stock market average up around 500 percent from the start of the decade. That compares with less than half that for the Dow Jones industrial average.

In West Germany, Hood sees flat growth during this first quarter. This reflects in part the German market's sensitivity to interest rates, as well as the negative impact on West German exports from somewhat slower global growth.

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