The New Market Movers - economic trends that will affect the future of the stock market

Kiplinger's Personal Finance Magazine, Jan, 2000 by Robert Frick

TRENDS | To make money in the decade ahead, you'd better be on the right side of these six MEGAFORCES.

ANDREW FOSTER has a challenging but straightforward job helping pick Asian stocks that end up in several of the Matthews family of funds. From his office, assuming the fog hasn't rolled far past the Golden Gate Bridge, 25-year-old Foster has a clear view of San Francisco Bay and Chinatown. Foster's office is also a prime location to peer into the future because he sits at the nexus of some of the most powerful trends that will shape our financial future.

Those trends can be maddeningly intertwined and will magnify each other's momentum, much as the billiard balls on the pool table in Foster's office do after a crisp break. But these investment tradewinds are so powerful you will want them at your back as you go into the new millennium.

One economy from many

Perhaps the most important trend has shown itself in recent years to be the scariest--the globalization effect, in which the U.S. economy is increasingly blending with those of other countries. And nowhere has that trend been reflected more dramatically than in the performance of Matthews Korea fund, which showed a loss of 65% in 1997, but has gone up more than 150% in the past 12 months. When many Asian economies tanked in 1997, it sent shudders around the world. South Korea's experience shows how important international trade and the flow of money have become. Korea's pre-1997 boom, the bust that year and the spectacular recovery ail owe much to the flow of foreign investment in or out of the country. Like it or not, Korea is closely tied to the world. So are we in the U.S.

This integration is key to the U.S. economy. "Americans have never spent or earned a higher percentage of their income from international trade," says Daniel Griswold of the Cato Institute's Center for Trade Policy Studies. In the past 25 years, Griswold points out, the share of the world's economy represented by imports has grown from 14% to 25%, and it's still climbing.

Not just how much is being shipped across borders, but what kinds of goods has changed dramatically. This provides a further clue to the economy of the future. While exports of goods have grown, the flow of money--so-called direct investment--has increased even more. Also, the trade in intellectual property, such as software, is burgeoning. In fact, the weight of what the economy exports every year has increased only very slightly since 1960, even though the value has risen threefold. That makes sense, says Griswold: "You can buy a ton of steel for $300, or buy Microsoft Office for $300."

The lesson here is to invest globally. Make sure your portfolio includes international players that can take advantage of the free flow of business and investment around the world.

Being everywhere at once

ONE REASON globalization is accelerating at such a clip is the blistering rate of advances in communications technology. Aside from the Internet, which is creating a vast web of computer connections, international phone traffic has jumped to ten rimes its 1980 level. This has created cheaper and better ways of doing business.

Before he moved to San Francisco, Andrew Foster worked in Singapore for a consulting firm. Obviously, consulting needs an up-close-and-personal touch. But it wasn't long ago that investing overseas did, too. "The data and communications can be pumped to us almost real rime from Asia," says Foster. "Sitting here in San Francisco, we feel we're very much in the know." Foster's boss, Paul Matthews, points out that just a few years ago an investment manager had to be "in country" to do a thorough job. Although he still travels to Asia several times a year, most of the firm's work can be done "quite comfortably" from the U.S.

And while the Internet is clearly a pivotal force in revolutionizing business and society, you should approach the Net as an investor selectively. Forrester Research predicts that business transacted over the Net will explode from $43 billion in 1998 to $1.3 trillion in 2003. Much of how the public will perceive that increase is through advertising done by online retailers. And while Forrester predicts that retail dollars spent over the Net will rise from about $8 billion in 1998 to $187 billion in 2004, some analysts say that most or all of the dot.com retailers may never make much money.

The naysayers make some good points. Investors in Internet retailers have been taught that earnings don't matter and that products sold over the Web will cannibalize "real" firms, says Aram Fuchs, CEO of FertileMind.net, a Web site that seeks to puncture what Fuchs sees as the e-commerce bubble. Fuchs points out that traditional businesses have barriers to entry that cut down competition, while "with the Internet, there are no barriers to entry."

So embrace the communications revolution, but do it through the so-called pick-and-shovel companies, those that provide the networks, software, switches and other necessities.