Foreign Stocks Bagged Biggest Profits for US Investors in 1993

US stock markets did well too, but may be overvalued, analysts say

`HERE'S the market ending the year just like it has been doing throughout most of 1993, with international stocks showing strong gains,'' says Hildegard Zagorski, an analyst with Prudential Securities Inc.

The flashing computer screens in Prudential offices around Ms. Zagorski were telling the story vividly: The value of country funds, such as for Chile and Argentina, were on the rise, in part because of an upgraded recommendation by one Wall Street brokerage house. But overseas stocks, Zagorski notes, have won strong support from investors during 1993.

The United States stock market did well in general this year too, Zagorski says.

So much so, that annual year-end bonuses for brokers and traders are up around 30 percent from last year, according to a report by Bloomberg Business News. Final year-end statistics will not be available until the new year. The securities industry is looking forward to about $9 billion in overall profits, according to Bloomberg. Pretax profits for this year are running well ahead of 1992, which was also a record year for the industry.

Major market indexes, such as the Dow Jones industrial average and the Standard & Poor's 500 posted increases over 1992. The S&P 500, for example, is up about 6 percent - the 14th year in the last 16 years to record an advance. Stock market gains, experts note, come from a combination of factors, including low interest rates and low-inflation, which pushed bond-yields to 30-year lows. The big winners, in addition to many international stocks, were stocks from developing countries, companies dealing in mergers and acquisitions, and mutual funds in general. The last is underscored by Mellon Bank's $1.7 billion purchase of Dreyfus Corporation, the nation's sixth largest mutual fund management company.

Investors poured billions of dollars into mutual funds during 1993. Currently, there are twice as many mutual funds in the US as stocks listed on the New York Stock Exchange.

The merger and acquisition market also proved strong, running well ahead of last year, with transactions in excess of $280 billion already announced. The M&A market, however, has slackened considerably since October.

Among the three largest national trading exchanges, the New York Stock Exchange continues to list the largest number of major corporations; the smaller American Stock Exchange, some analysts say, continues to prove highly innovative in offering new products and services; but the ``winner,'' in terms of total volume, continues to be the NASDAQ over-the counter market.

However, two yardsticks often used to measure the performance of stocks - the price-earnings (P/E) ratio, and the dividend yield - suggest that the market is overvalued. Based on earnings in the previous 12 months, the S&P 500's P/E is around 22, near the postwar high; meantime, the dividend yield continues to stay low. It is currently reading around 2.7 percent. In a more typical market, the yield ranges between 3 and 7 percent.

In its Dec. 15 issue, ``The Outlook,'' a weekly market review published by Standard & Poor's, recommends that investors maintain a cautious stance in 1994 - having a portfolio of about 50 percent stocks, 35 percent bonds, and 15 percent cash.

Standard & Poor's notes that the S&P 500 index has not tumbled as much as 10 percent in the past 38 months.

According to Martin Skala, a senior editor with ``The Outlook,'' the only longer bull market free of such a drop since the late 1920s was a period of 44 months ending in February, 1988.

Thus, a correction cannot be ruled out, according to the S&P analysis. Still, ``The Outlook'' remains mildly optimistic; it projects that the S&P 500 will end 1994 at around 475 points, about 2.5 percent above the current level.