I received a synopsis of a conference w/ Abbey J Cohen this AM re: Asia and US markets.
Tom,
FWIW, see what her opinion is re: US bank exposure to Asia.
"...money center banks
don't have a significant exposure to Asia. She stated that Citibank is
puting in ATMs, but she said they are not issuin spec loans. On the
contrary, 60% to 65% of non-performins loans are held by Japanese
banks. Less than 5% of non-performing Asian loans are held by US
banks. In financial services, the failure of some Asian institutions
may even open up opportunities for US financial organizations (as she
cited the US closing of Daiichi-forgive my spelling). "
Here is the synopsis in entirety,
She believes global markets now possess less risk than 6 mos ago or a
year ago. The reason: in 2h96 and 1h97 the risk premium in the credit
markets decreased considerably, but rewidened considerably in 2h97
following Alan Greenspan's "irrational exuberance" comments (that Abby
claims were directed at credit markets rather than the stock market.)
Greenspan's comments triggered a notable expansion in the risk premium
spread of markets around the world. Since the risk premia rewidened,
she believes the risk in the capital market is now lower.
Abby believes that the US market is 5% to 10% undervalued now based on
GS valuation models. In August the market was at fair value, but since
October the market is undervalued. She believes it is very difficult
to determine whether international markets are undervalued (since good
fundamental and accounting data are less certain from companies in many
international markets), but she did state that the overvaluation of
international markets last summer has diminished.
Abby believes the fundamental picture in the US is superb. First,
fiscal policy is sound as the government reduced the deficit (since
1990) from 6% of GDP to practically 0. Second, US corporations are
better managed with margins up since 1990, ROEs at 22% (from 11% in
1990), and the return on invested capital also doubled. She said she
could "go on and on." The economy is good and the problems in Asia
will slow the US in the short term but are not a "big deal." She said
that the US is the largest domestiv economy in the world and that
foreign trade is less important in the US than in either Europe or in
Asia.
As for Asia, the problem is due to "lousy returns on capital" and not
to a lack of capital. In fact, she claims, excess capital led to
untenable equity and real estate levels. No one thought they had any
risk, so they invested in increasingly risky projects. Abby likened
the Asia crisis with the U.S. savings and loan crisis; S+L managers
took on the riskiest loans they could find since someone else covered
the risk.
She said the mostly likely scenario for the US has Asia lowering GDP
0.5% from what it would have been otherwise. She said that for most
companies, Asia is statistical noise. Some companies will have greater
impacts, but this will be the general impact. She cited that Asia is
only 30% exports that are, in turn, only 13% of US GDP. According to
Abby, Asia is serious but the US economy is solid and Canada, Mexico,
and Europe are improving so it will only cause a small dent to profits.
She also noted that we export 30% of our trade to Asia but import 48%
of what we take in from other countries. Hence, Asia is a source of
production rather than a source of demand.
Goldman Sachs thinks that the markets overreacted to Asia, particularly
in two areas: financial services and technology.
In Fin Svcs: all the stocks are under pressure despite a very favorable
inflation and interest rate scenario. She said that money center banks
don't have a significant exposure to Asia. She stated that Citibank is
puting in ATMs, but she said they are not issuin spec loans. On the
contrary, 60% to 65% of non-performins loans are held by Japanese
banks. Less than 5% of non-performing Asian loans are held by US
banks. In financial services, the failure of some Asian institutions
may even open up opportunities for US financial organizations (as she
cited the US closing of Daiichi-forgive my spelling).
In technology: She said approx 50% of tech customers are
international. She said that some tech companies will get clobbered,
but 1) on average 70% of the international business tech business is in
Europe where demand is improving and 2) most of the Asian business is
in Japan.
Abby also favors small cap stocks. She said the risk premia for small
cap stocks has increased steadily for 2 years and is up even more over
4 years ago. She believes small cap stocks now offer "extremely gopod
value." Small stocks 1) offer attractive relative value, 2) will come
into favor when investors see that the US is just fine, and 3) will
gain interest with the increase in volatility as investors move to more
active stock selection and sector rotation.
Abby expects that by the end of 1998 the S+P will be at 1075, the Dow
will be at 8700, and the Nasdaq will be at 1776 (that's her number).
She said these should be easily achieved. She expects 8% profit
growth in 1998 (down from 12% in 1997). Positive surprises include the
possibility for multiple expansion as foreign investors come back to
the US market. Her negative surprise concerns earnings, particularly
that any specific company might disappoint.
She does not see a recession in 98 or 99.
She expects wage an price pressure to be a little more troublesome than
in 97, but not serious yet.
Abby expects the long bond to trade between 5.75% and 6.25 for 1998
although it could go lower in the near term. |
