U.S. faced with foreign 'investment gap'

September 18, 1990|By Michael R. Sesit | Michael R. Sesit,Dow Jones News Service

NEW YORK -- The global scramble for cash is leaving the United States with a foreign "investment gap" that analysts warn will lead to a weaker dollar, higher U.S. interest rates and a slower U.S. economy.

If first-half trends continue, foreigners will invest $40 billion in the United States by the end of the year, down 72 percent from the $141.7 billion worth of U.S. stocks, bonds and real assets, real estate and companies those investors added to their holdings last year, according to Salomon Brothers Inc.

At the same time, U.S. investors are purchasing assets abroad at an annual rate of $62 billion, up 16 percent from the $53.6 billion they bought in 1989.

That investment gap already has contributed to the dollar's decline. From its highest point in the past 12 months, the dollar has dropped 20 percent against the mark, 18 percent against the pound and 14 percent against the yen. And the trend suggests that the dollar will drop further.

Analysts say the dollar's recent weakness indicates that foreigners are still shying away from U.S. markets.

In fact, long-term capital outflows (investments of a year or more) from the United States currently exceed capital inflows. The only other time that has happened since 1982 was during the October 1987 global stock market crash, said Nicholas P. Sargen, an international economist at Salomon Brothers.

Behind the foreigners' retreat from U.S. markets and the growinappeal of foreign securities to U.S. citizens are rising interest rates abroad, the expectation of lower U.S. rates, a falling dollar and a weakening U.S. economy.

On a semiannual, compound-yield basis, 10-year U.S. Treasury bonds are currently yielding 8.85 percent. That compares with 11.81 percent for equivalent British bonds, 8.83 percent for West German bonds and 7.70 percent for Japanese bonds.

Friday, the yield on the benchmark 10-year Japanese government bond set a high for the year.

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