Peering at their computer screens in Tokyo, London, and a dozen other financial centers, investors saw value in the United States last year. The Dow Jones industrial average was booming. And the falling dollar - once it stabilized - meant US equities were cheap. Pounds, yen, francs, guilders, pesos, riyals, dinars - all manner of money shuttled into the US last year, buying and selling more shares of US corporations than at any time in history.
Gross transactions (buying and selling combined) by nonAmerican investors last year reached an estimated $271.4 billion, according to the Securities Industry Association (SIA). Almost every region of the noncommunist world snapped up US equities. The British, Canadians, Japanese, and Swiss were the most enthusiastic buyers.
As always, of course, it was the prospect of return on investment balanced against relatively low political and economic risk that enhanced the attractiveness of the US market. But, notes Carolyn Hildebrandt, assistant vice-president of the SIA, the bull market was a major factor. The Dow rose 23 percent during the year and was exceptionally strong between late January and March.
The plunging dollar was also an important lure. The dollar gave up 20 to 30 percent of its value against major currencies.
Although foreigners who invested in the US prior to the dollar devaluation suffered losses, once the dollar stabilized at a lower rate during the late spring, the yen and other currencies went farther when it came to new US investments. That prompted a buying spree - led by the Japanese - that extended not only to US stocks but to US real estate and businesses.
Finally, says Ms. Hildebrandt, many overseas investors have simply been looking for international diversification. In their quest, they cannot ignore the US market, which accounts for 40 percent of the world's equity trade.
Still, when one discounts the longterm interest in the US that British and Canadian investors have by nature of cultural ties, 1986 was very much the year of the Japanese investor. Japanese activity in US equities tripled between the first quarter of '86 and the third quarter, second only to Britain.
This was largely because the yen-dollar exchange rate stabilized around 160 yen to the dollar in late July, notes John D. Connolly, investment strategist with Dean Witter Reynolds in New York. Japanese investors figured ``currency was not as much of a threat'' to their investments and saw that Japanese stocks were trading at 45 times earnings while US stocks were a less precarious 13 times.
Moreover, the Japanese government encouraged insurance companies and pension funds to invest offshore. This meant, primarily, US bonds, but there was a spillover into US equities.
``It was a conscious decision to buy in US dollars,'' says Mr. Connolly. ``It was part of the Japanese trade strategy to soak up dollars [by buying US bonds and stocks] and firm the yen.''
That strategy should continue, even with the dollar slipping in recent days to new lows against the yen and other currencies.
Other than the British, European investors - most importantly, the West Germans - were not as enthusiastic about the US in '86. German activity in US equities actually fell during the year, and the third quarter saw net sales of $166 million. This was largely because of the persistent instability of the dollar against the mark.
``Europeans are underweighted because they haven't liked the smell of the US dollar,'' Connolly observes. ``That, of course, makes them potential investors.''
But they'll seek US equities only when the dollar and the mark reach an equilibrium and German investors can cease worrying that a dollar investment today could erode in value if the mark rises even higher in the future.
At present, the dollar is trading for around DM 194, and Connolly reckons it could go as low as DM 175. Thus he expects German investors to remain aloof, since ``it would take a tremendous appreciation in their investments to offset that currency loss.''
Still, on the whole, the global-mindedness of investors continued to grow in 1986. Overall activity of Americans in foreign stocks, for instance, rose to $72.4 billion in the first nine months of '86 (latest figures available) - up 59 percent over the same period in '85. Purchases by US investors were especially strong early in the year but slowed in the second half. Mainly, notes Ms. Hildebrandt, this was because overseas stock markets stumbled late in the year.
Money goes around the world - but only when there's profit in the wind.