That sentiment has led an increasing number of foreign investors to move their money out of U.S. markets, say investment strategists. Even before the most recent accounting scandals, foreign investment in U.S. stocks and bonds was down.
Foreigners bought about $45 billion worth of corporate and other types of U.S. bonds in the first three months of this year-half the amount they spent during the same period a year ago, according to the Bureau of Economic Analysis. Foreign investors put $25 billion into U.S. stocks in the first quarter of this year, down sharply from nearly $40 billion a year earlier.
U.S. investors, of course, have been selling off stock as well. The Nasdaq Composite Index closed Friday at nearly one-third of its value a year ago. And the Dow Jones Industrial Average has dropped more than 10 percent in the past year. Though economists expect foreign investment to recover a bit in second quarter results, those trends aren’t likely to reverse permanently until confidence is restored both at home-and abroad-in Corporate America.“This has certainly given people a sour taste of the U.S. asset markets,” says George Magnus, UBS Warburg’s London-based global chief economist, of the recent string of corporate scandals.
The shift in sentiment, and in capital, may mean a longer recovery period for the U.S. stock market-and, perhaps, the U.S. economy-than economists had been counting on a few months ago. For years, the U.S. market has been regarded as a “safe haven” for investors, praised for its transparency and stability. It has attracted an increasing amount of money from abroad-by some estimates more than 10 percent of U.S. equities are now held by foreigners. But the fallout from Enron, WorldCom and other corporate collapses have left many foreign investors feeling bewildered and betrayed.
“In the late 90s, the U.S. was the paragon of innovation, efficiency, and, ultimately, success,” says Stephen Paskoff, an Atlanta-based employment lawyer and president of Employment Learning Innovations, which provides legal and leadership training. “Now the dotcoms have basically collapsed, telecom is collapsing, and people are beginning to think that much of what they thought was success was nothing more than fraud and artifice.”
The “accounting horrors” have left many European investors bitter, says UBS Warburg’s Magnus. “There’s been real pause for thought at whether they’ve been hoodwinked-and I don’t think that’s putting it too strongly at all,” he says. “This is sort of undermining the equity markets at a time when there is a recovery taking place. There is a disconnect [between the economic and stock market recovery] and this may compound the problem.”
The U.S. (and the global) economic downturn, along with the September 11 terrorist attacks, have contributed to the drop in foreign investment in the U.S. equities markets. But while most analysts say the U.S. economy is slowly improving, the damage to Corporate America’s image abroad may be much tougher to overcome.
Overall foreign direct investment in the U.S.-the purchase of plants and properties, for example-has suffered as well, though it has recovered slightly from the sharp drop following the terrorist attacks. In 2000, foreigners invested a whopping $281 billion in the United States-more than in any other country in the world. But last year, they invested less than half that amount, or about $124 billion. If the first quarter’s preliminary estimate of $24.6 billion is any indication, foreign direct investment may be even lower this year.
The once-dominant dollar has also suffered, falling about 14 percent against Europe’s common currency, the euro, in the past three months. And it’s down more than 10 percent against the Japanese yen this year. Nariman Behravesh, chief economist and executive managing director at the Pennsylvania research firm DRI-WEFA., says the “crisis in confidence in the U.S. corporate sector” is partly to blame for the drop in the dollar’s value.“It’s not so much September 11 or the recession as much as it is a combination of a crisis of confidence and a huge current account deficit,” says Behravesh. “A lot of portfolio managers and investors were heavily weighted in dollars and were looking to diversify away from dollar-denominated assets. The recent scandals basically made up their minds for them and pushed them over the edge.”
When–or whether–they will change their minds again is unclear. But analysts agree that the only way to restore confidence in the U.S. market and model is to dole out harsh punishment to those guilty of accounting abuses, and to enact and enforce stricter guidelines in the future.
In the short-term, the stock market may suffer from this shift in sentiment and companies may struggle under new regulations and requirements. But in the long run, many analysts say that the U.S. model should emerge intact. “I think it is going to take time for trust to be rebuilt, but I am sure it will be,” says UBS Warburg’s Magnus. “These revelations are generating a sort of cathartic effect. The question now is what will be done to deal with them.”
