As stock markets from Singapore to Sao Paulo join the US in stomach-churning gyrations, investors overseas are asking an old question with new urgency: Can the world learn to live without American economic and market leadership?
So far, the answer seems to be no.
Wednesday's trading was a grim illustration that misery loves company. Shares in Hong Kong, London, Paris, Seoul, Tokyo and Zurich all fell sharply in the wake of a bleak Tuesday in New York. In Europe, several exchanges closed at levels not seen since 1997, before an afternoon rally in New York gave the Dow its best day in weeks.
PHOTO: NY TIMES
The fear, shared by public officials, executives and ordinary investors, is that further big losses could choke fledgling recoveries in these countries. The US, which has been the main accelerator of global growth for a decade, now looms as its biggest brake.
"A slump in the US would shatter global confidence," said Anais Faraj, European strategist at Nomura International in London. "Unfortunately, the odds of that happening are rising."
Already, there are signs that the erosaion in investor confidence in the United States is hurting companies abroad. On Monday, Hugo Boss, the German fashion designer, cut its profit forecast for the year by 16 percent, citing a weak American market, particularly for men's suits, which it said are sensitive to the market and the broader economy.
"Our business in the United States has declined noticeably in the last few weeks," the company's chairman, Bruno Saelzer, said. "Men have to be in a positive mood to buy high-end menswear."
Shares of Hugo Boss have tumbled 21 percent since Monday, and the company faces a shareholder lawsuit in the US accusing it of misleading investors.
It has been one of the bleakest weeks in memory on the Frankfurt stock exchange. Despite staging a late-afternoon reversal on Wednesday after the rebound of the Dow, Germany's main index is trading at its lowest level in five years, dragged down by insurers, which are nursing battered portfolios, and banks, which are disclosing loans to WorldCom, the American long-distance carrier that filed for bankruptcy protection on Sunday.
Every day, it seems, brings more grim tidings from European firms. Siemens, the German engineering giant, said on Wednesday that its profit for the fourth quarter would be lower than the third. The company said orders for telecommunications equipment and other gear had fallen 20 percent.
No alternatives
"Investor confidence is completely damaged," said Hartmut Jende, a small investor in northern Germany, who has seen much of his stock portfolio evaporate. "The situation here is no different than in the US market. There are no alternatives."
Executives say that as a symbol of the world's largest economy, Wall Street cannot help but cast a shadow over other markets. That pre-eminence, they said, has not been eroded by the accounting scandals.
"The die is cast in America," said Sir Martin Sorrell, chief executive of the WPP Group, the advertising firm. "The recession started there, and that is where the recovery will come from as well."
Though WPP is based in London, Sorrell said the ad agency would follow the example of American companies like Coca-Cola by reporting stock options as an expense in its next financial report.
By some yardsticks, economists say, Europe and Asia ought to be a refuge from the turmoil in the US. Most European economies are in the midst of a slow recovery, which many economists think could pick up later this year. In one sign of Europe's changing fortunes, the euro has risen in value relative to the dollar, even surpassing it for a few days last week.
Although companies such as Deutsche Telekom and Vivendi Universal have suffered big declines in share prices -- prompting the dismissal of their chief executives, Ron Sommer and Jean-Marie Messier -- there have been relatively few disclosures of corporate impropriety.
Indeed, some experts said the oustings of Sommer and Messier presage an era of responsiveness to shareholders. "You can't prevent the rise of an equity culture in Europe," Faraj at Nomura International said. "These governments are committed to privatizing their state companies."
Asia has different concerns. Because its economies depend heavily on exports to the US, investors there are sensitive to any erosion in confidence in America. At the same time, countries like Thailand and South Korea have been able to rekindle demand for their goods among their own consumers. Having survived the financial crisis in 1997 and 1998, which leeched the excesses out of their economies, many Asian countries are enjoying a rebound.
"Our fundamentals are much better," said Ajay Kapur, an East Asian strategist at Salomon Smith Barney in Hong Kong. "The US is going through an asset deflation that Asia went through five or six years ago."
South Korea expects its economy to grow 6 percent this year, on the strength of exports and domestic demand. Five years after it ran out of foreign-exchange reserves, igniting a global crisis, South Korea has US$115 billion in reserves.
Until the latest turbulence in the US, Seoul's market was a star performer, more than doubling from September to April. On Wednesday, it fell 3.2 percent, 23 percent below that peak.
"People saw the fundamentals in [South] Korea as stronger than in the United States," said Ha Sa-jun, an executive at Woori Financial Holdings in Seoul. "Korea is stronger now than during the economic crisis."
Asia is showing other signs of financial independence. This week, China offered shares in the Hong Kong unit of one of its largest banks, the Bank of China, raising US$2.5 billion to US$2.8 billion. Unlike previous offerings of Chinese state companies, which were pitched aggressively to American investors, these shares were bought largely by investors from Japan and Hong Kong.
"They're selling this mainly to an Asian audience," especially Japanese investors who want to bet on China's growth, said Henry Lee, the managing director of the Hendale Group, an investment firm in Hong Kong.
Few countries have had more experience with the aftermath of a bubble economy than Japan. And yet, Japanese investors have poured money into the US since the beginning of the year, in part because the strengthening of the yen makes American stocks relatively cheap.
The world's safest
Despite the recent scandals, analysts say Japanese investors still consider American stocks -- and assets denominated in dollars -- as the safest in the world. Some note that the problems at Enron and WorldCom is less pervasive than the cronyism that helped drag down Asia's economies.
"In the US, the problems have been generated by individual companies," said Atsushi Ishii, the deputy general manager of the global investment department at Tokio Marine and Fire Insurance. He said he expected Wall Street to recover later this year. "The financial condition of the market overall is still strong," Ishii said.
Investors in Latin America are also hoping for a recovery in the US. Sao Paulo's benchmark stock index has fallen in recent weeks to its lowest levels since 1999, largely in response to Wall Street.
Dany Rappapport, an analyst at Tendencias, a consulting firm in Sao Paulo, said Latin American countries were particularly vulnerable to turmoil in the American market because they run large current account deficits.
"They need a steady influx of foreign capital to keep their accounts balanced," Rappapport said.
At times like these, economists and analysts agree, breaking the psychological link between global markets would be desirable. The phrase on the lips of brokers in Asia and Europe is "decoupling."
But that is difficult, even for prosperous economies like those of Western Europe. In order for Europe to buck the jittery mood emanating from the US, economists say European countries would have to generate strong consumer demand in their markets.
"The US has been carrying the global economy for far too long," Faraj said. "Even Atlas needs to take a break."
The trouble is, Europe's economy, while growing, remains sluggish. Retail sales in Germany have dropped, while consumer confidence in Italy and France is tenuous. Critics say that European governments have shied away from steps, like liberalizing labor markets and lowering taxes, that would bolster consumer spending and corporate investment.
Given the interconnectedness of the global economy, some think that even if Europe took these steps, it would still not be able to deflect the ill winds from Wall Street.
"How can you decouple the European markets from the United States?" said Max Dietszch-Doertenbach, an investment banker at Doertenbach & Co in Frankfurt. "So many of these companies are commingled. So many of these companies are active in the same markets."
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