Learning from turmoil

Andrew Leckey

September 04, 1991|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Pity the novice investor who got his start this year. He has sweated through a Middle East war, turmoil in Japan, a perplexing economic recovery, scandal at Salomon Brothers and a coup attempt in the Soviet Union. The end result, surprisingly, is that his investments are in about the same shape or somewhat better off than they were before all the excitement began.

Yet there are still lessons to be learned . We must keep firmly in mind that other countries don't really function the way that ours does. Americans are often naive, as they were in regard to the Soviet Union, about how positive things appear to be going overseas. Financial markets, though they tend to catch themselves in the end, frequently overreact whenever surprising events do occur. For example, the troubled Soviet Union really doesn't have the economic impact that initial market reaction to the news of the coup seemed to indicate.

The investment world is definitely better off than it was before the Soviet coup attempt. Confidence in not only the Soviet Union, but the financial markets of countries such as Germany and Austria, have been bolstered.

"World financial markets should learn from the Soviet coup attempt that they shouldn't panic," said John Legat, senior portfolio manager for G.T. Europe Growth Fund. "The international markets started all the panic, with Japan the first to react negatively even though it has virtually no dealings with the Soviet Union, and later the European markets were badly hurt as well."

"The Soviet incident has created a perception that it is safe to invest overseas, and we might see new investors in international funds as a result," said David Booth, chairman of Dimensional Fund Advisers, which runs five international mutual funds.

"The attempted Soviet coup was a good excuse to sell, but there wasn't really a lot of selling," observed Michael Sherman, portfolio strategist with Shearson Lehman Brothers. "When events turned positive there was a lot of buying, but that was more a reflection of a positive attitude toward the U.S. market rather than any connection to the incident in the U.S.S.R."

Any good international news tends to support a bullish outlook for the U.S. market, but a fundamental bullish momentum must exist beforehand, Sherman believes.

"Though the U.S. stock market is higher than before the attempted Soviet coup, the U.S. economy is basically supporting this movement because there's a lot of liquidity in the market and that helps insulate us from events abroad," said Charles Clough Jr., investment strategist with Merrill Lynch & Co. "I think we're now back to the normal market course, realizing that the Russian economy isn't developed and that it's a very weak exporter and importer."

There should now be less fear on the part of Western democracies and companies regarding investment in in the Soviet Union. "The demise of the coup may encourage the Western world to move more money into the Soviet Union to keep this from happening again, thereby improving Soviet living standards and encouraging the democratic process," said Legat.

All this shows that diversification is often a tricky proposition. "Investment diversification into a number of world financial markets works well most of the time because one market moves down when another is moving up," Booth concluded. "However, during periods of perceived international crisis, all markets tend to move in one direction, thereby diluting the appeal of diversification."

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