Larger Corporate Profits Fuel Overseas Markets
North America and Asia lead recovery, with Europe on the rebound
NEW YORK — OVERSEAS stock markets, spurred by improving economic-growth rates in Europe and Asia outside Japan, have been heading upward in recent months. Barring any unexpected slowdown in the global economy, most major overseas markets are expected to post gains in share prices throughout the remainder of 1994, stock experts say.
''The world economy continues to expand,'' says David Wyss, an economist with DRI/McGraw Hill, an economic-consulting firm in Lexington, Mass. Higher, noninflationary growth, as is now occurring in many parts of the world, is generally favorable for stocks. Economic growth usually translates into larger corporate profits and, thus, higher share prices for equities.
Mr. Wyss says he expects the global economy ''to grow between 2.5 percent to 3 percent in 1994 and another 2.5 percent in 1995.'' North America and Asia, excluding Japan, ''are leading the recovery,'' Wyss says. But European growth rates are also improving. Growth should be up at least 1 percent for the large German and French economies this year, he says; it will be higher, at around 2 percent, in Britain and Italy.
Latin American growth is soft this year, he says, largely because of turmoil in Mexico surrounding that nation's recent presidential election. But Latin American economic growth is expected to snap back in 1995, Wyss says.
What's significant, however, is that overall global growth is now propelling global equities markets. United States dollars are once again pouring into overseas stocks, following a slowdown earlier this year.
World equity markets rose in August for the ''second straight month in a row,'' according to a spokesperson for Morgan Stanley Capital International, a unit of investment house Morgan Stanley & Co. in New York. Morgan Stanley recently released its latest world statistics for August. According to the statistics, European equity markets outperformed the Far East. But excluding Japan -- the largest Asian market and the world's second-largest stock market behind the US -- Asian markets outperformed both Europe an and US markets.
Some 18 of 22 industrial-nation markets that Morgan Stanley follows were up in August, led by Malaysia, Finland, New Zealand, and Ireland, the investment house reports. Of 20 emerging markets Morgan Stanley follows, 17 were up in August. And Morgan Stanley's world index, which monitors global-market trends, has been on an upward course since the beginning of 1993.
Dennis Jarrett, chief technical strategist for investment house Kidder, Peabody & Co. in New York, says he sees at least 13 major markets, including those of Germany, Japan, South Korea, Singapore, and Taiwan, on an upward trend.
A number of other markets, including those of the United Kingdom, France, Israel, and Hong Kong, have broken some recent market downturns and appear to be in a more positive position now for further market gains, Mr. Jarrett says.
US securities markets have also been up in recent months, reflecting a late-summer rally. But US securities firms have watched trading profits tumble. On Tuesday, Wall Street announced its worst trading profits for brokerage houses since the 1987 stock-market crash.
Pretax trading losses at US brokerage houses totaled $628 million for the second quarter of 1994, compared with a profit of $2.4 billion for the same period in 1993.
THIS year's losses reflected rising US interest rates, which especially eroded the value of bonds and other fixed-income instruments. Profits from bond trading dropped sharply at many brokerage houses, offsetting gains in stock trading.
Woes in the US bond market, however, made many equities more attractive to investors. That same pattern, experts note, has been repeated throughout parts of Europe, where some interest rates have been rising.
Stocks will continue to outperform bonds in Europe, maintains Marcus Grubb, European financial analyst for investment house Salomon Brothers Inc. in New York.
Salomon Brothers, Mr. Grubb notes in a recent study, has increased its weighting in German equity shares, given that nation's expanding economy. Salomon Brothers also sees continued expansion for the stock market in Britain.
Grubb believes the FTSE 100 index, the most followed stock index in Britain, will rise toward 3,600 points by the end of the year. It's now at about 3,200 points.