US securities industry strives to retain edge

Ahead in diversity, efficiency, and openness, the US securities industry and telecom sector are innovative giants, but they face challenges

WALL Street deserves a bouquet. United States financial companies and securities markets, buffeted by recession and massive employee layoffs in the late 1980s and early '90s, are once again expanding staff, posting sizable profits, creating new financial products, and exploring innovative services.

In the process, the US has clearly regained its preeminence as the financial trading capital of the world.

Case in point: The Chicago Board of Trade, a futures market, is putting together a new computerized global trading system involving futures and options products that will enable clients to obtain information - and, in some cases, trade - far from Chicago, including overseas.

Both the New York Stock Exchange and the American Stock Exchange are adding to their listings of non-US companies.

NASDAQ, the over-the-counter market, now has about 30,000 computer terminals abroad that provide foreign investors up-to-date information on US securities.

``The United States is the dominant financial market in the world,'' says Hans Stoll, director of the Financial Markets Research Center at Vanderbilt University in Nashville. ``We lead the world in stock-market electronic systems. Our financial products are dominant. And we are the biggest exporter of trading systems.''

The US is also out front in equities, as measured by overall market capitalization, or value. At the end of 1993, the US held about 37 percent of the total world capitalization of stocks, valued at $5.2 trillion, according to the Securities Industry Association in New York.

Japan had 21 percent of all capitalization, equal to $3 trillion; Britain had 8 percent, equal to $1.2 trillion. By contrast, by the end of 1988, Japan was king of the stock-market hill, with 40 percent of world capitalization, worth $3.9 trillion; the US had 29 percent, equal to $2.8 trillion; Britain had 8 percent, equal to $771 billion.

Changes in international exchange rates, plus gyrations in local stock markets, help explain the relative shifts in capitalization values between the US and overseas markets over the past six years. The Tokyo stock market, which had become the world's largest by the late 1980s, crashed in the '90s, shedding more than one-half of its value. Although Tokyo is once again posting gains in share value, reflecting an improving economy, the US has regained its primacy as the world's dominant stock market.

What's especially impressive about the US securities industry, experts say, is its diversity of markets and variety of products. Few nations can boast having two large stock markets; the US has three (the New York Stock Exchange, NASDAQ, and the American Stock Exchange), as well as regional and local exchanges and a number of commodities and futures markets.

Products available to investors span esoteric derivatives, mutual funds, and numerous fixed-income instruments.

``The US market is clearly more operationally efficient and open to competition and diversity than overseas markets,'' says Marshall Blume, a professor of finance at the Wharton School at the University of Pennsylvania. ``And US investors have far more disclosure about their products than is the case in other countries.''

``US markets are the deepest, most liquid, most efficient, and most innovative in terms of new products and new tech- nologies,'' adds David Strongin, vice president and director of international finance for the Securities Industry Association.

The quality of US investment houses is noted abroad. For example, ``Euromoney,'' a monthly financial review in London, publishes an annual list of ``awards for excellence.'' Euromoney's 1994 rankings show US financial houses winning 21 of 28 categories, including best capital-raising brokerage house (Merrill Lynch & Company); best Eurobond house (Lehman Brothers); best underwriter of global bonds (Merrill Lynch); best government-bond house (J. P. Morgan); best international equity house (Goldman Sachs); best foreign-exchange bank (Chase Manhattan); best futures and options exchange (Chicago Mercantile Exchange).

CAN America's primacy continue, however, as overseas markets, such as London, woo investors more aggressively, and as financial markets become more global, linked together in extensive computerized trading networks?

A number of experts see clouds on the horizon. The US securities industry ``has a major challenge; it must ensure that [the US] is an appealing environment for foreign companies to list shares in US markets. If not, more and more of the trading business will be offshore,'' says Robert Hormats, vice chairman of Goldman Sachs International, New York. ``If the dollar is not seen as a stable currency, that will further weaken the ability of the US to attract overseas investors.''

US investors' increased interest in overseas stocks, while basically positive, is also raising warning signs, experts say.

On the one hand, owning overseas stocks is healthy; most financial managers have long argued that Americans should have a diversified portfolio that includes non-US issues. Diversification reduces market risk and increases rates of return. Moreover, the ``internationalization'' of stock trading is a stabilizing factor in world commerce. Companies can increasingly gain access to underwriting and capital, wherever they are located.

On the other hand, the shift of US investment dollars to overseas equities means less money at home for US equities. A reduced inflow of foreign funds since the '80s, along with a higher outflow of US investment dollars, puts downward pressure on US bond and equity prices.

The outflow of US dollars also ``indicates that Americans are concerned about the value of US stocks,'' Mr. Hormats says.

During the first quarter of this year, for example, foreign investors made net purchases of $6.3 billion in US stocks. But Americans acquired foreign equities valued at $17.8 billion; half of that amount, $9.6 billion, went to Japan.

US investment dollars also continue to pour into ``emerging markets,'' such as South Korea and Mexico, although at a slower pace than last year. In 1988, the total market capitalization of equities in emerging nations was around $483 billion, representing about 5 percent of all stocks globally. Today, the capitalization is valued at $1.6 trillion, representing 12 percent of total market capitalization.

Dollars will likely continue to flow into overseas stocks during the remainder of the decade, says Arnold Kaufman, editor of ``The Outlook,'' a monthly financial review published by Standard & Poor's Corporation.

Part of the reason is the weak dollar. Investors, particularly overseas investors, are selling dollar-related assets to buy assets linked to stronger currencies.

But economic growth patterns also play a role, Mr. Kaufman says. Economic growth in many overseas countries, particularly emerging-market countries, should continue to outperform US growth during the remainder of the 1990s.

The US faces vigorous competition in maintaining its primacy in securities markets, Kaufman says. Can Wall Street meet its new test? Stay tuned.