Foreigners dump U.S. stocks
Falling dollar could increase outflows
Jonathan Fuerbringer
New York Times
Nov. 28, 2004 12:00 AM
Are foreign investors souring on Wall Street? The data say yes.
In September and August, foreign investors were net sellers of $5.9 billion of American stocks, according to the latest Treasury data available. These two monthly declines highlight a sharp slowdown in inflows from abroad since the beginning of the year, when the 12-month total through February was $58 billion. In September, the 12-month inflow had dropped to $18.7 billion.
While there have not been negative consequences for the American stock market so far, a steeper decline in the dollar could increase the net outflows and make American equities less attractive.
The net selling of American stocks by foreigners has probably continued since September, said Ian Scott, a global equity strategist with Lehman Brothers in London, "because the dollar has continued to fall, and I think that is one of the motives behind the outflow."
He also said that Lehman's recent surveys show that global investors are less interested in stocks generally and that those who are buying stocks are looking for value stocks, which are easy to find outside the United States.
Bob Froehlich, chief investment strategist at Deutsche Asset Management, said that fear that the United States' current-account deficit would continue to grow, along with the belief abroad that the federal budget deficit will be difficult to reduce because of the war on terror and President Bush's promises to make his tax cuts permanent, "has spooked some investors outside the United States."
Such fears have yet to have any impact on the recent performance of the U.S. stock market. Indeed, as William Rhodes, chief investment strategist of Rhodes Analytics in Boston, noted, "It is an old rule of thumb that foreigners are the last in and the last out." So it is possible that this outflow is a contrarian signal for the stock market.
Foreign investors, for example, were pouring their money into American stocks at a 12-month rate of $153 billion in March 2001, a year after the American stock market had peaked at all-time highs. On the other hand, as the 1990s stock rally took off in 1995, foreign investors were selling American equities at a 12-month rate of $8.4 billion in March of that year.
In fact, if the net outflow of foreign investors from the stock market did continue in October and November, domestic investors clearly did much more than pick up the slack, as the major Wall Street indexes have recently reached their highest levels in more than three years.
Rhodes also argued that a Wall Street rally that is driven by domestic investors is healthy.
"We would like to have foreign participation, but it is healthier to have a domestic rally," he said, "because foreign money is more likely to leave."
But many analysts think that the dollar, which has fallen to record lows vs. the euro in recent weeks, will fall sharply in the months ahead. Such a decline, they say, would not be good for stocks here.
If there is a steep dollar decline from here, Froehlich of Deutsche Asset Management said the stock market "will be hard pressed to get positive returns in that environment."
The United States and its allies are clearly willing to let the dollar fall further without any coordinated statements or coordinated intervention in the foreign exchange market to slow the decline, analysts said, citing recent statements from the Bush administration and the meeting of the Group of 20 industrialized countries this month in Berlin. Only the Japanese are expected to intervene to slow the yen's climb in value and the dollar's fall in an effort to protect Japan's export business.
If the dollar continues to decline, Froehlich said, the best performers on the U.S. market would be the big American companies that get a great deal of their earnings from abroad because a weaker dollar increases the value of foreign profits. Among this group, based on annual sales abroad, are Exxon Mobil, Ford Motor, IBM, General Electric, General Motors, Intel and Procter & Gamble, according to Standard and Poor's.
He said that in such an environment stock picking would be very important because he suspected that only about 50 of the 500 stocks in the S&P stock index would have gains.
Froehlich, however, is not predicting a sharp decline in the dollar. He expects that it will fall 3 or 4 percent more by the end of the year, based on the Federal Reserve's broad dollar index. At that level, the dollar would be about 9 percent from the recent low that it reached in 1995 and about 10 percent from the record low the dollar hit in 1978, based on the Fed's index.
Froelich said the dollar could rally then as foreign investors realized that the American economy is still growing nicely and that the Federal Reserve will keep pushing interest rates higher, making investments in bonds here more attractive.
But other analysts are predicting a steep fall for the dollar, one that could take it to or below the record lows it reached in 1995 against major European currencies and the Japanese yen.
One reason for those predictions is that the American current-account deficit, the broad gap between the nation's exports and imports of goods and services, is heading to a record of more than $600 billion this year.
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