Investors seek bearings after stormy correction

April 13, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

A stock market correction is much like a hurricane or tornado. Even though you may see it coming, it's traumatic to deal with and never turns out exactly as expected.

You have to get through it somehow and pray the damage won't be long-term in nature.

Investment-wise, that's easier to say if you're a veteran who has weathered downturns before. But the fear associated with tumbling stock prices is overwhelming for conservative souls who just recently became daring and entered the market.

G.T. Capital Management Inc., a San Francisco-based investment firm with 16 mutual funds, saw its assets double in the past year to more than $10 billion in stocks and bonds of the U.S. and other world markets. A lot of those new assets at G.T., whose offices I visited recently, came from first-timers.

Gaudy returns from emerging markets and small-company growth stocks were responsible for the increase. A weak U.S. economy made other markets more attractive, while growth and diversification were great ideas for investors soured on low yields from certificates of deposit and money-market funds.

Now comes 1994 and a heavy dose of reality stemming from rising interest rates, speculation and the Whitewater debacle in the United States, plus political woes in places like Mexico, Russia, China and the Korean peninsula.

"There is no similarity between this year and last year, because nothing's hot this year," sighed Christian Wignall, the Cambridge-educated chief investment officer for G.T. who oversees investments throughout the United States, Asia, Europe and Latin America.

He leaned back and looked at his computer screen, its returns mirroring worries at home and abroad.

"This is an early learning experience for many investors who just entered the stock market," said Mr. Wignall, whose firm is currently emphasizing cyclical stocks and the bonds of countries that exhibit economic discipline. "Hopefully, they're taking a long-term perspective and weren't naive enough to think their stocks would just go up."

The United States has a growing economy, with gains in jobs, productivity, retail sales and housing starts. Such good news forced the Federal Reserve to raise interest rates to avoid the bugaboo of inflation.

"Relax and wait, for this is a normal cycle as the Fed tries to stop inflationary expectations," Mr. Wignall explained. "The rise in interest rates will ultimately be minimal because the patient isn't all that sick and doesn't need strong medicine."

While he predicts an "uncomfortable" 12 months for investors, Mr. Wignall is convinced this depressed period will end as stock markets worldwide recoup losses by the end of the year.

There have been successes among G.T.'s 16 funds. G.T. Japan Growth Fund rose nearly 11 percent to rank ninth among all stock funds in the first quarter, while G.T. America Growth rose 5 percent to lead small-company funds.

Mr. Wignall is shifting to stocks likely to benefit from economic recovery, such as Chrysler, General Motors, Aluminum Co. of America, Inco Ltd., Germany's Volkswagen and the British building-materials firm Tarmac. Among equity markets, he favors Japan and Germany.

International bond markets have taken a hit.

"U.S. investors are taking profits in Europe because they're so worried about the U.S. markets," said Simon Nocera, a former financial economist for the International Monetary Fund and now a G.T. vice president in global fixed income. "There are fantastic values in international bonds, but the market is so bearish that you must sit back and wait for a little more history to this correction."

Mr. Nocera believes overseas bond markets will outperform the U.S. bond market, thanks to improving fundamentals. Because of his confidence in the economic moves of their governments, he favors long-term government bonds of Argentina, with current yield recently at 7.64 percent; Mexico, 9 percent; Morocco, 6.5 percent; Italy, 8.25 percent; Sweden, 7.34 percent; Britain, 7.62 percent; and Spain, 8.96 percent.

But he's cut back holdings in Venezuela because of that country's deteriorating economy and rising inflation. He also has concerns about Japan and Germany.

"The bond markets are reaching a level where there's no risk anymore," concluded Nocera. "The best way to protect your portfolio is to diversify into as many countries as you can."

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