With an Uncertain Home Market, US Investors Look Across the Sea

SPURRED on by high rates of return and attractive share prices abroad, Americans have been pouring billions of dollars into overseas stocks in the past several years.

While the pattern slowed slightly in the early part of 1994 - reflecting economic uncertainties in the United States - global investing will continue to win new converts into the mid-1990s, experts say. ``Investors are looking for diversification,'' says Hildegard Zagorski, an analyst with Prudential Securities Inc. in New York. ``The presumption is that Europe is coming out of recession. Parts of Asia are looking quite good and so are parts of Latin America.''

Many overseas economies are now posting favorable rates of growth. The global economy could grow as much as 2.8 percent in real terms in 1994, says David Rolley, an economist with DRI-McGraw Hill, a consulting firm in Lexington, Mass. That growth rate, adjusted to reflect US overseas trade, is up from 2 percent in 1993, he says.

Asia is currently the strongest region economically. The Chinese economy - estimated to be expanding at more than 10 percent annually - is fueling a boom throughout much of East Asia. However, the Japanese economy continues to lag, Mr. Rolley says. Europe is also expected to do better this year, growing between 1 and 1.5 percent. Latin America will also post growth. ``By the middle of this decade, we could actually have a worldwide economic boom,'' Rolley says.

Bond traders are nervous about that outlook, worrying about a renewal of global inflation and the erosion of bond values. But for the stock market, the possibility of expanding economies means higher corporate earnings for many companies, translating into robust news for overseas equities.

Another factor propelling the interest in overseas stocks: Many investors remain apprehensive about the direction of the US stock market. That concern is evident in the divergence now appearing between the so-called ``blue chip'' market and smaller, often more innovative companies. Late last week, the indexes representing these two sectors - the Dow Jones industrial average (for blue-chip stocks) and NASDAQ (for high technology stocks) - marched to different drummers.

The Dow has been quietly regaining some of its market losses after US stock prices fell sharply in late March and early April, following a second hike in short-term interest rates by the Federal Reserve Board. NASDAQ, however, was sagging late last week, reflecting worries about another round of possible rate hikes by the Fed. ``There's a flight to quality under way,'' Ms. Zagorski says. ``At a time of uncertainty, investors take a more conservative approach, such as buying blue-chip stocks. They also seek out diversification.''

Mutual fund companies promoting global stock funds appeal to investors by stressing diversification. The Wall Street Journal reported last week that investors purchased a record $160 billion worth of overseas stocks during 1993, with 40 percent coming from US investors. As American investors become more hesitant about buying US equities, they will be less likely to buy overseas issues, says Arnold Kaufman, editor of ``The Outlook,'' a market review published by Standard & Poor's Corporation.

Several overseas equity markets, including Germany, Britain, and Hong Kong have been hitting highs this year. James Stack, like some other market watchers, argues that global stocks remain risky because of political and economic uncertainties abroad. New belt-tightening steps by the Fed - considered likely later this spring or summer - are expected to hurt higher-risk emerging market funds, as US investors pull back from stocks in general, Mr. Stack says.

For the first quarter of 1994, 10 out of 22 developed stock markets followed by Morgan Stanley & Co. rose in value; about 16 of those markets posted gains exceeding the US stock market. Three of them did especially well: Italy, Finland, and - despite its economic woes at home - Japan.