South East Asia and Oil are the best buys now! (page 1 of 4)

The US stock market has continued to rally strongly but part of these gains have been mitigated for foreign investors by the continuous decline in the value of the US dollar, which has now depreciated by more than 30% since the beginning of 2002.

And while eternally optimistic guest commentators on CNBC only addresses the rather embarrassing subject of a collapsing dollar seldom, when it is addressed it is always in a positive context, such as: a lower dollar makes American manufacturers more competitive and that, as a result of weakness in the dollar, the earnings of the multinationals will rise.

However, I believe that the dollar would have to depreciate at least 50% against the Asian currencies ex Japan in order to have an impact on the existing trade imbalance between the US and Asia including China and India. Since 1985, the dollar has declined from around 250 Yen to 116 Yen, and we have not seen an improvement in the trade balance with Japan. And a revaluation of the Asian currencies of such a magnitude isn't likely to occur for the time being.

Moreover, I'm not so sure that a weak dollar will boost the earnings of the multinationals by as much as analysts expect, simply because the overseas economies have been weakening over the last six months or so. According to the tax based NIPA data, foreign-based profits fell by 30.7% in 2002, despite a 5% decline of the US dollar in trade-weighted terms and 15% decline against the Euro.

Still, because of the weak dollar, companies such as McDonalds and Procter & Gamble could report higher sales and earnings than had been expected. Without the dollar's decline Procter & Gamble's sales would have been up by 5% and not as reported by 8%, while McDonald's sales would have risen by just 1% instead of the reported increase of 5.6%.

I may add that for MacDonald same store sales, at stores open for more than one year remained almost as unappetizing as its horrible hamburgers, since they declined 3.6%! Also, considering that in Asia, where 58% of the world's population lives, the markets for many consumer goods are far larger than in the industrialized countries, and where growth potential is the highest, the impact of SARS on consumption and, therefore, also on the earnings of multinationals will become a factor.

There is another point, which makes me cautious about the outlook for the corporate sector in America, despite a lengthy program on CNBC during which numerous 'very good news economists' were interviewed and the CNBC commentator concluded that, 'corporate America is healthier than you think'! If indeed the overseas economies are weakening - and this seems certainly to be the case in Europe and much of Asia - then excess capacities will continue to put pressure on prices.

At the same time, costs for insurance, healthcare, depreciation charges, and pension funds are rising rapidly in the US and could, therefore, continue to squeeze corporate profits. And, while it may be true that there has been a slow improvement in credit quality, overall the corporate profit picture is far from rosy. The main problem is that in 2001, net fixed investments declined from $407.3 billion in 2000 to $268.1 billion, as a result of lower gross investments and sharply higher depreciation charges, which led to the recent profit squeeze.

In 2002, the net investment position worsened further, because gross fixed investments in the non-financial sector fell by another $84 billion while depreciation charges increase by another $40 to $50 billion, which would have lowered net fixed investments to just around $100 billion and is quite negligible compared to the $10 trillion US economy.