World Markets Flex Their Muscles

HANG on to your hats! The stock market appears to be on another of its periodic roller-coaster rides, with the Dow Jones industrial average rising to its highest point yet last week. Whether the Dow will continue to climb - or drop into a correction - will be resolved by time. But it is not just the United States market that has been flexing its muscles of late, but overseas markets as well.

In fact, the overseas markets have been showing heftier momentum than the US. Virtually all major overseas markets outperformed the US during the third quarter, which ended in September. While the Standard & Poor's 500 edged up 9.8 percent during the quarter in the US, most overseas markets were registering gains of between 10 percent and 50 percent - the type of climb that can quickly pull the most cynical individual investor right off the financial sidelines. Austria was out front during the quarter, in terms of stock gains. But France, West Germany, Switzerland, Japan, and Italy were also up, and well ahead of the US.

Can that strong overseas market momentum continue? For Europe, the forthcoming economic unification in 1992 is a major catalyst for growth. Still, some analysts are now raising caution signs, if not warning signs.

``Compared to Europe and Asia, the US market will probably do quite well during the fourth quarter,'' says Peter Lamaison, president and chief executive officer of IDS International Inc. in London. IDS International is a global investment management company. Mr. Lamaison notes that his firm ``currently has more money invested in the US than Europe, and more invested in Europe than Asia.''

It's not that Lamaison is sour on European or Asian markets. He very much likes the French, West German, and Swiss markets. But looking down the road, he believes that the impact of higher interest rates could adversely affect the European and Asian stock markets, while helping to make the US market more attractive.

Lamaison's reasoning? ``The likelihood is that the future flow of the US dollar will be upward,'' he says. But that in turn, he says, will increase pressure on West Germany and Japan to push up their interest rates, to offset the attractive power (for overseas investors) of the higher US dollar. West Germany, Lamaison notes, is currently posting economic growth of around 4 percent, an amount considered far too high by the folks at the Bundesbank, who prefer the 2 percent to 3 percent range. As a result, the Bundesbank on Friday raised its discount rate from 5 percent to 6 percent and the emergency funding Lombard rate from 7 percent to 8 percent.

``We see Europe as a whole continuing to grow and remaining strong throughout 1990,'' says Peter Perkins, an international economist with DRI/McGraw-Hill Inc., a consulting firm in Lexington, Mass. Currently, growth for the European Community is running between 3.75 percent and 4 percent, Mr. Perkins reckons. Next year, that growth will moderate slightly, down to 3.25 percent to 3.5 percent, with West Germany still leading the pack.

Lamaison also expects a slight cooling of the West German economy, although not by much. For the moment, he is upbeat about France, Switzerland, and Spain, in addition to West Germany. ``In France, the man in the street now thinks profit is a good word,'' which is good for stocks, he says with a laugh. Moreover, he says, ``France is ideal for 1992, because the country is right in the middle of everything.''

Which stock markets does Lamaison not like in Europe, or at least, look on with concern? Scandinavia and Britain, the latter because of the threat of higher interest rates.

Looking toward Asia, Lamaison believes that Japan also faces the potential of slightly higher rates, which could affect corporate earnings there. Australia has 20 percent interest rates, which doesn't make that market overly attractive, he says. He's also wary of Taiwan, Hong Kong, and South Korea, although he likes Singapore.

Barton Biggs, director of worldwide strategy for Morgan Stanley & Co., notes that Thailand is the ``newest Asian tiger,'' i.e., a high-growth Asian economy geared toward exports. But Biggs sees economic growth and corporate profits slowing considerably in 1990 and '91.