After the deluge of US cash: A wall of American money has hit world share markets this year. Larry Black looks at prospects for a continuing outflow

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THE FINAL numbers are not yet in, but by any measure, 1993 has been a remarkable year for global investing. The world's markets have been deluged by what one fund manager describes as a 'huge wall of money from America'.

And there seems little to suggest that the tidal wave - Americans bought perhaps dollars 60bn worth of foreign shares this year, more than half in European companies - has begun to ebb. Behind that wall is the pressure of dollars 12bn a month that continues to pour into US mutual funds, looking for returns that a slow-growth, low-inflation economy is not providing.

US markets, despite pervasive fears that they are overvalued, have grown by only 7 per cent this year. Elsewhere - notably in the UK, the largest single beneficiary of this flight of US capital - share values have soared at an average of three times that rate.

Markets have been driven by a combination of falling interest rates in Europe and Japan, privatisation schemes in the Third World and Europe, and the successful conclusion of the Gatt round and the North American Free Trade Agreement.

Some markets have done considerably better: Hong Kong is ending the year up more than 80 per cent, Spain and Germany more than 40 per cent, not to mention the explosive growth in more thinly capitalised bourses in the emerging markets of the Far East and Latin America. It is hardly surprising that US investors, according to Merrill Lynch, have bought more foreign shares than domestic ones, on a net basis.

'Americans are learning that it isn't such an insular world out there, and that there are opportunities outside our markets,' says David Strongin, director of international finance at the US Securities Industry Association in New York.

Americans' appetite for foreign stocks, notes Richard Davidson, a strategist with Morgan Stanley, is also being fed by the increase in US-based research on foreign companies and the growing listing of foreign companies on US exchanges whose equity trades in the form of American Depositary Receipts.

The result has been returns for international US mutual funds of some 35 per cent. Single-country funds have seen the value of their portfolios rise more than 37 per cent, while the share- market value of listed closed-end funds is up 40 per cent.

Indeed the success of the overseas funds has reached the point where some economists worry about the amount of money they are siphoning away from domestic opportunities in the US.

Of the current dollars 2,000bn held by all US mutual funds (a sum greater than the gross domestic product of Britain and France combined), some 7 per cent is now invested offshore, but the proportion is changing fast.

A number of well-known mutual fund managers, including Vanguard, Scudder and T Roe Price, are all advocating substantial shifts in portfolio weighting toward offshore shares, with some proposing foreign allocations in excess of 50 per cent. Robert McCabe, chief market analyst at Merrill Lynch in New York, says that in recent months, some 40 per cent of the money poughed into mutual funds has been routed overseas.

At the same time, investment managers are doing their best to lower expectations for the coming year.

'Of course it won't keep up,' says Ralph Wanger, manager of the Acorn International Fund, up 35 per cent to date. 'Thirty per cent returns are much higher than anybody has any reason to expect.'

After the year the funds have had, some fear is creeping into the market. The most immediate threats to the US foreign investment boom have passed for the moment: a meeting of Federal Reserve governors seems to have minimised the risk of inflation, suggesting that a rise in US interest rates - which would have improved returns at home - is unlikely soon.

The success of the Gatt negotiations has also pre-empted any return to protectionism that might have upset local markets, scaring American capital.

Some US analysts are warning their clients of disappointing earnings growth, especially in Europe. Money managers also worry that some overseas stock markets may be overvalued: shares in Europe are selling at an average of 22 times 1993 earnings, compared with a 10-year historical average of about 14.5.

'There will be earnings growth next year, but it still won't be enough to make current valuations defendable,' one analyst argues.

Pessimists believe the overseas money will evaporate quickly at the first sign of trouble. But the Investment Company Institute, a Washington-based research group that follows mutual fund performance, points to data from the 1987 stock market crash, showing that holders of stock funds cashed only 2 percent of their assets, preferring to ride out the correction.

On the other hand, the sceptics note, those stock funds represented domestic equity. 'To invest in emerging markets, you have to accept both volatility and currency risks as facts of life,' one New York market strategist says.

(Photograph omitted)