Steven H. Nagourney, managing director and chief global investment strategist of Lehman Brothers, talked with BW Senior Writer William Glasgall on investment strategy for a world where the dollar is down and the yen is up.
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OnlineHost: Good evening and welcome! Tonight Business Week Online presents, in its regular weekly conference, a discussion of where to invest in today's world of a weak dollar--and a powerful yen. What are the best places to put your money in this situation? Can it work to your advantage?
Business Week Online is pleased to have as its guest tonight Steven H. Nagourney, managing director and chief global investment strategist of Lehman Brothers Inc. In a Wall Street career dating back to 1982, he has become a leading analyst and observer of investment opportunities and financial issues all over the world, both by country and by industry. He is a frequent speaker on these subjects, including in testimony before Congress. Steven Nagourney's screen name is SNagourney.
Also on stage is Business Week Senior Writer William Glasgall (BillGBW), who specializes in global finance, economics, and investing. Since joining the magazine in 1981, he has produced more than three dozen cover stories and numerous special reports, including the annual report on global investing. He has been a Bagehot fellow in business and economics journalism at Columbia.
The moderator is Jack Dierdorff (JackBW), consulting editor of BW Online. Now on to our discussion of investing amid currency turmoil--and answers to the questions you send us via the Interact button.
JackBW: Good evening to all of you here on AOL. And hi, Steve Nagourney and Bill Glasgall.
BillGBW: Good evening, Steve and Jack, and to all of you on AOL.
SNagourney: Hi, Jack, glad to be here.
JackBW: Bill, as BW's expert editor tonight, you get to ask the first question.
BillGBW: Thanks. Steve, will the dollar go lower--and how can I use that to make money in '95?
SNagourney: Good question. Well, short-term I do think the dollar is going to remain under downward pressure, with two consequences. Monetary expansion in Japan is still extremely weak. I do believe we'll continue to see dollar selling by Japanese exporters, which have been big dollar hedgers, and dynamic hedgers, attempting to keep their buying in line with options movements. So we'll continue to see a portfolio-insurance-type effect on the dollar-yen relationship. I also think we'll see yen borrowers, particularly in the East Asian area, trying to cover their positions. And as long as the U.S. continues in intense trade talks with Japan, there'll be pressure on the yen.
Then there's the mark. I think the pressure we'll continue to see on the mark will emanate from the rest of Europe. The Italian lira will continue to be weak against the mark, as will the Spanish peseta, due mostly to political difficulties.
And now we will have great uncertainty on the French franc, and that is what we're seeing this evening, as the shock in the French presidential election, or at least the first round, gave the victory to the socialist Jospin--a great surprise. So the franc has fallen to near the historic low that it set six weeks ago.
JackBW: DBNavarro has this question about Federal Reserve policy on interest rates.
Question: Do you think the Fed will succumb to international pressure and raise interest rates?
SNagourney: No. I believe the economy has slowed down enough for them to hold pat.
BillGBW: I absolutely agree.
SNagourney: But I don't think we'll see any real inflationary pressures from the dollar's decline. Imports are only 12% as large as GDP. And then substitution effects may dampen price hikes.
BillGBW: Our read from the Fed and the White House is no rate hike, at least until the economy picks up more.
JackBW: RGpez craves investment advice for the younger generation.
Question: I'm an 11-year-old investor. Is the Janus Mercury fund good to go with?
SNagourney: I can't get into recommending funds.
BillGBW: We try to steer away from specific funds and stocks, but thanks for the question.
JackBW: But how about general advice for a young investor?
SNagourney: General advice is the same as for anyone who is starting to save money today, which is to use a program of broad diversification, both in the U.S. stock market and overseas, while recognizing that there are moments in the cycle that are not advantageous for investing overseas. This is one of these moments temporarily, but over the long term it will make sense to have increasing portions of your portfolio overseas because of the globalization of market economies.
JackBW: MikeMc1 asks this one.
Question: The dollar seems to remain constant vs. gold. Why does the Bank of Japan continue to buy yen, further widening the dollar-yen ratio?
SNagourney: The Bank of Japan is buying dollars against the yen, but in order to prevent the yen from appreciating. But we have seen that the price of gold in yen is at a 17-year low--it's about what it was in 1976 when the dollar price was $125. The big problem in Japan is that the monetary base is not expanding. It has grown over the past year at 3% vs. 8% for the dollar, so we simply have a lot more dollars than yen.
BillGBW: Steve, what is the minimum amount you should have in foreign stocks--20%? 10%? 30%?
SNagourney: On a short-term basis, about 10% As time goes on, over the next 5 to 10 years, I think that percentage will about double.
BillGBW: Steve, Is the Japanese stock market going to crash some more?
SNagourney: Well, if we enter into a period of currency stability, we would expect to see institutional investors in Japan, and probably worldwide, start to emerge from their holes. And a stable dollar would improve earnings expectations. But the 17% decline in the Japanese stock market this year is certainly darkening the financial outlook. That relates to deflationary developments, which are much more damaging than inflation. Deflation reduces incomes, cash flow, and collateral values, but does not reduce debts.
Also, there are or, rather, have been five bubbles in Japan. We had a real estate bubble--busted. A commercial land price bubble, stock market bubble. There remain two other bubbles: the trade surplus and the yen. I think we're waiting for those bubbles to break, and until they do, it's going to be very hard to make dynamic investments in Japan.
JackBW: MrPotato01 has a question about Europe.
Question: What do you think about a common currency in the EEC?
SNagourney: I think we have a common currency in the EEC, called a Deutschemark. I would add that the D-mark area is enlarging, and will continue to do so.
BillGBW: Do you think the French election portends a devaluation of the franc and faster growth?
SNagourney: Since de Gaulle, every new French president has devalued the franc upon coming into office. Mitterrand did so in '81 and '83. I believe we are already seeing a franc devaluation, driven by the markets, as I said earlier. The franc has closed now, on Sunday, at an historic low. With 12% unemployment in france, virtually no job creation, a continued deflation in the economy, if the new president doesn't devalue, the market will do it for him.
JackBW: RLNunn1 wonders what you think about U.S. stocks.
Question: Do you feel, because inflation is not a problem and interest rates will remain low and corporate profits seem to be high, that the stock market will continue to make records throughout the year?
SNagourney: My global strategy has been to be 25% overweight relative to the U.S. benchmark in the world portfolio this year. Nothing goes up in a straight line forever, and I can see some correction in the stock market--perhaps over the next few weeks. But the areas I think will do well will be companies in the consumer-staple area, the technologies, some industrial companies that are increasing their international exposures. The lagged impact of the lower dollar will continue to help earnings well into the second quarter. Dividends also should be rising this year.«MDNM»
BillGBW: Steve, for our non-tech audience, can you explain "overweight" in layman's terms?
SNagourney: Certainly. The U.S. represents about 40.5% of the world's market capitalization. So to have a position invested in the U.S. of 40.5% would be considered market weight. And if one is higher than that, that would be overweight.
JackBW: Duffcamp has his eyes on Asia.
Question: Steve, what do you think of investing in the Hong Kong market at this time?
SNagourney: Well, the Hong Kong market should continue to be firm because it is pegged to U.S. interest rates, but the uncertainties are building with regard to how precisely China will come to take over Hong Kong in 1997. The Chinese are potentially looking to thwart the aspects of the agreement between the British and the Chinese, and that's causing a great deal of uncertainty, which should limit gains in the Hong Kong market.
BillGBW: A lot of our audience invests in Aussie funds. How's the outlook Down Under?
SNagourney: With regard to Aussie funds, first off, as long as the dollar remains under pressure, the Australian bond market, I think, will continue to be hurt. The inflationary outlook in Australia is very positive on the bond side. Trade, however, is very negative, with very big upward pressure on the current-account deficit. And the money credit growth outlook is not very positive. This produces a neutral outlook on Aussie bonds relative to other bond markets. And without any big rises to come in industrial commodity prices, the stock market should continue to lag the U.S. market.
JackBW: Janybird has the next question.
Question: Do you think that gold would be a good investment at this time or in the future?
SNagourney: Well, for Lehman Brothers, we have a 5% holding in gold. We have an asset allocation globally that is 50% equities, 30% bonds, 15% cash, and 5% gold. Although the gold price in dollar terms has been relatively stable over the past year, it has risen over the past four months, and is attempting to go to $400 again.
Until we see genuine currency stability, which is a long way off, I think we'll continue to see upward pressure on the price of gold. The decline in the price of gold in yen and D-mark terms tells me that the Japanese inevitably must increase the monetary base, and that the government itself must go to massive deficit financing to thwart deflationary dynamics. In Europe, the disinflationary trend tells us that eventually we'll need to see easier credit, and so when I look at world monetary growth today, it is at historical lows and I believe will be rising over the next few years, and that should lead the gold price in dollars upward.
BillGBW: Steve, would you rather own gold stocks or bullion itself?
SNagourney: My preference is to own bullion, even though the carrying cost is high. Gold stocks, I believe in Australia and South Africa, represent some of the best values in those markets.
JackBW: UbaTuba wonders why Latin funds have gone up in the last week, and Poetry007 asks you this about Mexico.
Question: Steve, is now a good time to enter Mexico, and if so, how would you invest in Mexico now?
JackBW: Can you answer both?
SNagourney: Regarding Latin funds, investors are looking for currency stability, so what we've tended to see in the past three weeks in Mexico has been a 14% appreciation of the peso, which last Friday traded below 6 to the U.S. dollar. Also, back in early March, when we look at some of the fixed- income paper in Latin America--for example, Argentine floating-rate bonds--we can see that back then they were worth less than when they were trading as loans back in 1989. So there was a classic revaluation. Now, I believe it's too early to tell whether, in the case of Mexico, what we're seeing is an inflation bubble from the devaluation, or whether we'll see a wage-price spiral.
In Argentina, we have to await presidential elections. And in Brazil, which has also seen some revaluation of its assets, the government is proposing massive constitutional reforms, which are necessary to complete its fiscal and monetary policies. And it is uncertain as to whether the reforms will pass the Brazilian congress this year.
JackBW: BBartlett has a question now.
Question: What is it going to take to get the dollar to stop falling vs. the yen and the D-mark?
SNagourney: Against the yen, it is going to take a shift in Bank of Japan monetary policy beyond just cutting the discount rate, toward a policy of increasing the monetary base greatly. Which, as I mentioned earlier, has only grown 3% the past year. Secondly, I believe the Japanese must move to a massive program of deficit financing in order to (in both cases, monetary and fiscal) bring a halt to deflation--and, as a consequence, to bring the trade surplus of Japan down. I would also point out that the Japanese trade surplus is already declining as a share of Japan's GDP.
JackBW: Bill44262 has a rather cosmic question for us to conclude on. Can you answer fast?
Question: If Britain was the major economic power of the 1800s and the U.S. is the major economy of the 1900s, who's going to be next?
SNagourney: I believe firmly that the U.S. will remain for the foreseeable future the premier economic power in the world, if for no other reason than that the U.S. controls the technological revolution. I believe this is very similar to the late 19th century, when we went from the iron and steam age to the oil and steel age.
JackBW: Thanks, Steve Nagourney and Bill Glasgall. That's it for us tonight. And thanks for the audience questions.
OnlineHost: Thanks to Steven Nagourney of Lehman Brothers, Bill Glasgall, and the Business Week team for this conference on global investing. If you'd like to continue the discussion, we invite you to move to the BW Online Chat Room or to post your comments and questions on the BW Online Message Boards (try Economics & Finance).
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