The specter haunting Wall Street these days is fear that the turmoil in Asia will take a big dent out of U.S. corporate earnings and imperil America's seven-year expansion. With each new twist in the region's cliffhanger, the stock market reels between hope and despair, reflecting uncertainty that's unlikely to be resolved anytime soon.
One Wall Streeter who isn't spooked by the crisis, however, is international economist Joseph P. Quinlan of Morgan Stanley, Dean Witter, Discover & Co. "We think Asia's travails will have less of an impact on the international profits of U.S. companies than the market is currently assuming," he says.
To be sure, Morgan Stanley's analysts concede that U.S. exporters to Asia will take a hit and that some domestic producers will be hurt by an influx of cheap Asian imports. But while Asia accounts for roughly one-third of U.S. exports, they contend that America's exposure in the region is far less than most investors realize. A better way of gauging such exposure, says Quinlan, is to look at Corporate America's direct investment overseas and the sales racked up by its foreign affiliates.
Not only has the U.S. been the leading foreign direct investor for decades--shelling out $85 billion last year alone--but such investment has been heavily skewed toward developed nations. Through 1996, based on historical costs, 62% of the total was in Europe and Canada. Latin America's share was 18%, and all of Asia accounted for just 17.6%--with the remaining 2.4% in other areas.
The same pattern characterizes the sales posted by foreign affiliates of U.S. companies. Such sales revenues (including domestic and export receipts) are more than triple the size of U.S. exports, and over 59% of the take comes from Europe alone. By contrast, Asia provides only 18.8% of the affiliates' total sales revenues, and that continent's share of global trade by all countries is still a mere 7%.
Thus, Corporate America's biggest stake overseas lies not in Asia but in Europe. And the likelihood of continuing growth there this year, says Quinlan, suggests that "a relatively healthy Europe could offset a sick Asia, resulting in far less damage to profits than many investors expect."