Asia Is Hurting Stocks. Asia Is Helping Stocks

Depending on which sectors you choose, you're both right

As Asia's economic crisis deepens, the U.S. stock market is skidding around like a hockey puck. With Asian news dominating the market, the Dow Jones industrial average took a heart-stopping 207-point dive on June 15, followed by a 37-point climb the next day, and a 164-point tear, to 8829.5, on the 17th--as news of a yen rescue made Asia worries fade.

Investors can't be blamed if they find this more than a little confusing. Will the Asia crisis hurt U.S. profits as exports drop? Or will cheap Asian imports and plummeting commodities keep a lid on inflation even as wages rise and consumers go on a spending spree? What stocks can prosper now?

There's no question that the earnings hit to big multinationals will be significant. 3M, for example, announced on June 16 that it expects profits to miss estimates because of both slowing Asian demand and the strong dollar, which lessens the value of overseas earnings. News of a yen rescue mission on June 17 was good enough to spark a major rally, but it won't be a long-term solution, most market watchers say.

WILDER STILL. Analysts such as John L. Manley Jr., an equity strategist at Salomon Smith Barney, are now expecting only modest earnings growth this quarter--a rerun of the 1.5% hike in the first quarter, as tallied by I/B/E/S Inc. Joseph V. Battipaglia, Gruntal & Co.'s strategist, thinks "the bull market can withstand a profit recession, as long as there's an end to it at some point, in the third or fourth quarter of this year, or in 1999." Few analysts think the flow of Asian flight money will play more than a marginal role in supporting the market.

The market's gyrations will probably grow still wilder as earnings season gets under way. We're already in the volatile preannouncement period, when companies warn analysts about their upcoming earnings reports. "Preannouncements are waving something of a caution flag," says Charles L. Hill, director of research for First Call Corp. The normal pattern is for 57% of all preannouncements to be negative. With the peak weeks of preannouncements yet to come, the tally already is 65% negative.

The soaring dollar is the culprit in many of the grim warnings, as exporters find it harder to sell their increasingly pricey wares. Plus, they see a strong dollar lowering repatriated profits from overseas sales. Had the dollar-yen rate stayed relatively stable, "we'd likely be 500 points higher" in the stock market, says Battipaglia.

Among the victims: computer makers and semiconductor companies. National Semiconductor Corp., for example, is down 47% since Jan. 1, and reached a 52-week low on June 17. Oil companies and other commodities producers are also getting buffeted as the prices of raw materials plunge.

SAFE HAVEN? How will the market deal with weaker earnings? "Money managers will focus on an ever shorter list of companies that deliver earnings," says Greg A. Smith, Prudential Securities Inc.'s chief strategist. Companies that either have low exposure to Asia's maladies or can profit from them will be big winners. Take retailers, particularly ones that sell apparel, which is often made in the Far East. According to Doug- las Schindewolf, an economist at Salomon Smith Barney, retailers are just getting to the point where they may see benefit, since items being shipped now were contracted for when Asian currencies started to depreciate last year.

U.S.-centric companies should also continue to benefit from strong consumer spending. Battipaglia likes Wal-Mart Stores Inc. and Toll Brothers homebuilders, for instance. Standard & Poor's Corp. recommends overweighting portfolios with consumer cyclicals and health-care issues, says Sam Stovall, S&P's equity strategist. And low interest rates and a merger wave are helping many financial companies. Morgan Stanley Dean Witter & Co. has seen its stock soar 33.5% this year.

Staying close to home may be the safest stock-picking strategy today. But even within the U.S., investors need to tread ever more carefully.

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