In '91, Caution Is Key To Global Investing

RECESSION, conflict in the Gulf, and slumping corporate profits add up to a host of uncertainties for global stock markets during the first half of 1991. Analysts also worry about the impact on global investment later in the year should the Gulf war drag on. During 1990, world equities markets were pummeled, losing some 18.7 percent of their overall value, according to Kathryn Jonas, vice president of Morgan Stanley Capital International, a division of Morgan Stanley & Co.

Morgan Stanley has created its own set of market indexes for all major capital markets. In the United States alone, it follows 400 stocks; globally, it monitors some 2,500 securities.

According to Ms. Jonas, only three of 20 markets making up Morgan Stanley's World Index had positive returns for 1990: the United Kingdom, up 6 percent; Austria, up 5.2 percent; and Hong Kong, up 3.7 percent. The other 17 markets ended the year lower than at the beginning of the year. The bottom performers were New Zealand, off 40.3 percent; Japan, off 36.4 percent; and Finland, off 33.3 percent.

The US index actually did fairly well, Jonas says. It was down only 5.6 percent - the second highest performing market in terms of local currencies.

Of course, last year's results may not have any relationship to what happens to global markets during 1991. To attempt to forecast stock markets is a speculative business at best.

So far this year, Morgan Stanley's World Index, which is based on 1,476 securities, is up only modestly. For the period Dec. 31, 1990 through Jan. 18, 1991, the World Index is up 0.84 percent. Top performing markets so far are Portugal, up 5.23 percent; New Zealand, up 3.2 percent; Japan, up 2.9 percent; Sweden, up 2.8 percent; and Spain, up 1.51 percent. The US comes in at number eight out of 20 world markets, up 0.71 percent. The bottom five markets for the current period are Norway, down 7.13 percent; Finland, down 6.03 percent; Austria, down 5.22 percent; Ireland, down 4.04 percent, and Luxembourg, down 2.54 percent. (All indexes are calculated in US dollars and without dividends.)

Perhaps one of the more detailed recent forecasts about global investing comes from Salomon Brothers. In a recent report, Salomon says a short war in the Gulf has already been discounted by markets, although a peace settlement has not been. Salomon sees a global economic slowdown, but nothing worse, and local warfare, ``not Armageddon.'' Salomon recommends bonds and interest-rate sensitive equities over the next six months.

The investment house does see potential gain in selective investing in global markets. Looking at individual countries, Salomon, as of Jan. 17, was recommending an overweighting of equities from Japan, the United Kingdom, and Spain, and reducing holdings in US and Continental European stocks.

Regarding Britain, Salomon says a market recovery is likely this year, based on falling inflation and interest rates, plus a gradual economic recovery.

Salomon figures that Japan's economy faces major challenges, including a significant slowdown sparked by a fall in capital spending. Official Japanese government growth estimates are too optimistic, Salomon says. Still, the investment house projects that Japan will be forced to push down interest rates by mid-year, which should be a plus for selected equities.

Continental Europe, according to Salomon, faces slowing economic growth. Thus, Salomon suggests an underweighting in equities from Germany, Switzerland, and Italy; the company takes a generally neutral position on France.

For Japan, some analysts anticipate a crumbling economy and further stock market deterioration. But the middle-ground position is probably represented by Lawrence Krohn, of Shearson Lehman Brothers Inc. Mr. Krohn says Japan ``will post its slowest overall growth performance since 1986 this year, with the economy growing about 2.6 percent.'' But the Bank of Japan may ease short-term rates slightly, helping the equities market.