Asia's Wake Still Turbulent

Investors cautioned to stay conservative; it's far from over

The stock market storm from Asia just keeps blowing harder, with a ferocity that keeps catching many US investors by surprise.

It knocked the legs out from under Wall Street last week, sending the Dow Jones Industrial Average down 110 points on Thursday, then 90 points on Friday.

The loss of Asian customers threatens serious impact on corporate America.

"Every day another major US company says the same thing, that it's earnings will be down," says Robert Dickey, a managing director at broker Dain Bosworth & Co., in Minneapolis.

Giant consumer-products company 3M (Minnesota Mining and Manufacturing), also in Minneapolis, last week forecast a 10 percent drop in fourth-quarter earnings because of Asian currency turmoil.

"It seems like investors are in a state of denial about how big the Asian crisis could be," Mr. Dickey says.

Among the potential impacts: slow economic growth worldwide, downward pressure on prices, and lower corporate earnings.

Strategic shift

That suggests to many analysts volatile times ahead, and two strategies in response: stocking up on conservative investments, such as growth-and-income mutual funds, or taking a more active role in your investing - looking for spots to buy or sell.

The first approach calls for adding defensive plays, such as retail firms or funds. They tend to do well in down as well as up markets.

The second strategy calls for increasing the amount of cash in your account. Some experts favor as much as 50 percent cash. It becomes a shield from sharp downward swings in the market, with the added benefit of available funds to snap up bargains.

In any event, be extra cautious about stocks or mutual funds with an Asian tilt.

The Asian impact could be "significant" for many major US companies with an international exposure, says Ralph Acampora, chief technical analyst at Prudential Securities. Low-cost Asian imports will soon flood US markets, he says, putting downward price pressure on US manufacturers such as General Motors. "We're all going to be buying lower-priced Japanese cars," he says.

Lower prices mean lower corporate profits and greater volatility on Wall Street, Mr. Acampora says.

Until recently, he had predicted the Dow Jones Industrial Average would reach 10000 in 1998. Now, forget it.

Smart bull

Acampora's new prognostication: the first half of 1998 looks good, with the market rising. But look out in the second half, when the market heads for "a major low." The Dow will not reach 10000 until 1999, he says.

"We should be prudent bulls," says Acampora. "Rotate into biotech stocks, utilities, REITs [real estate investment trusts]. The year will be difficult for small-cap stocks."

Slow growth in economy

Bruce Steinberg, chief economist at Merrill Lynch & Co., sees Asian turmoil cutting US growth by at least half a percentage point and pulling interest rates down.

For investors, that means "buy quality," says Richard McCabe, Merrill's chief market analyst, strong companies - or mutual funds that invest in them - with an outlook for stable growth... companies such as General Electric.

While the first quarter should be good for the stock market, the rest of the year will be sailing southward, Mr. McCabe forecasts.

He sees a market decline of up to 25 percent, with the year delivering "flat to down" returns. McCabe likes financial and insurance stocks, retailers, and pharmaceutical companies.

Some defensive adjustment seems in order, he says. Technology stocks, he believes, could keep falling, since many are export-oriented.

Sheldon Jacobs, who publishes the No-Load Fund Investor in Irvington-on-Hudson, N.Y., shares a similar outlook for 1998 and likes "concentrated" funds - mutual funds that hold relatively few stocks. In a volatile market, he believes fund managers may find it easier to monitor a few companies than dozens. Some concentrated funds that he likes for the long-term include Robertson Stephens Partners, (800-766-3864), Vontobel US Value, (800-527-9500), and CGM Realty (800-345-4048).

Some analysts, while admitting wariness, believe the impact of the Asia crisis may be exaggerated.

Peggy Farley, managing director of AMAS Securities, believes the market has already discounted much of the Asian turmoil. She expects the Dow at 9000 next year, with turbulence along the way.

And Al Goldman, chief economist at A.G. Edwards & Sons, is encouraged that the international community is moving to contain the Asian fallout. Asian governments are also taking dramatic steps, he says, citing Japan's new tax cuts aimed at stimulating growth.

Nonetheless, he urges investors to essentially "stay in US stocks," although he suggests keeping 10 to 12 percent of a portfolio in international investments.

Some of last week's sell-off may have represented year-end selling as money managers tidy up their account ledgers, says Greg Nie, chief market technician at Everen Securities in Chicago.

Impact of 'Typhoon Asia' in the US

The companies hurt most either have big customers in Asia or must compete with Asian companies. Among them:

Oracle: The world's second biggest software maker expects softer revenues because of slower Asian sales. Its stock recently dropped 29 percent.

Coca-Cola: Its dominant position in Asia starts to look like a liability.

Boeing: The aircraft giant may lose sales on 60 jetliners in Asia.

Fruit of the Loom and Haggar:

They face tougher competition from Asia for clothing sales in the US.

Many industries sit comfortably outside the Asian turbulence. In fact, the lower interest rates expected from Asian problems will work well for virtually all and especially well for some, such as banks. Ironically, some sectors, such as insurance, were frustrated by an inability to penetrate Asia. That liability has now become a bonus.

A few of those outside the wake:

Electric utilities: Already stock market stars, they will continue to benefit from falling rates.

Media: Most US communications companies download revenues domestically. They've been minor players in Asia and will feel minimal impact.

Financial services: The big banks with international business - Citibank, J.P. Morgan - will feel the pain, but regional banks with domestic customers should benefit from a strong US economy and falling rates. Insurance companies, likewise, have been slow to penetrate Asia and should be shielded. They pull most of their business domestically.

'Asia's going to be flooding our markets with [inexpensive imports]. That's going to hurt our companies, like General Motors.... There will be a bear market in the second half of 1998.... We'll hit 10000 [on the Dow] in 1999.'

- Ralph Acampora, Prudential Securities, New York

'The worst news may be over for Asia.... It is leading to a flight of capital to US markets.... I see 9000 on the Dow next year.'

- Peggy Farley, AMAS Securities, New York

'Asia will create potholes in the [US] bull market, not derail it.'

- Al Goldman, A.G. Edwards & Sons, St. Louis

'We expect Asian events to knock ... half a percentage point off US GDP [gross domestic product] in 1998.... Interest rates are headed lower, not higher.'

- Bruce Steinberg, Merrill Lynch, New York

'I think Asia may take longer than a year to come back.... We'll have a more challenging year [for the stock market] in 1998, a more modest year.'

- Sheldon Jacobs, The No-Load Fund Investor, Irvington-on-Hudson, N.Y.

'Investors are in a state of denial about how big the Asian crisis could be.... I see a zero percent return for the [US stock market] in 1998.'

- Robert Dickey, Dain Bosworth & Co., Minneapolis

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