GATT Market Apt to Look Bullish

If you’re among the horde of American investors who have piled into foreign stock mutual funds this year, consider GATT your long-term reward.

The apparent successful conclusion of a new General Agreement on Tariffs and Trade, expected to be signed in Geneva today by the world’s major trading nations, is unquestionably bullish for financial markets in the long run, investment pros say.

Despite seven years of tortuous negotiations that always bordered on complete breakdown, in the end the world’s governments saw the wisdom in perpetuating and accelerating the trend toward the freer global flow of goods and services.

It was, to be sure, the only logical conclusion. Harold Sharon, co-manager of the Warburg Pincus International Equity stock fund in New York, notes that as recently as 1973, the volume of world trade covered by GATT was a mere $155 billion.

The new agreement will cover more than $4 trillion in trade--much of which has occurred precisely because GATT negotiations since 1946 have successively lowered tariffs and opened markets, creating new jobs, new consumers and new wealth worldwide.

It is no coincidence that the U.S. stock market has skyrocketed along with expanding trade. Since 1973, the Standard & Poor’s 500-stock index has produced a total return (price gain plus dividends) of 755%. Many of America’s major companies now derive more than half their profits from foreign sales.

As one measure of what world trade has meant for the global stock investor, meanwhile, consider: Mutual fund tracker Lipper Analytical Services calculates that the average global stock fund produced an astounding return of 9,234% between 1962 and 1992--more than four times the return of U.S.-only stock funds in that period.

The new GATT doesn’t guarantee those kinds of stock returns over the next 30 years, of course. But in paving the way for greater trade, it does provide another reason for small investors to confidently declare themselves to be long-term holders of stocks here and abroad, Wall Streeters say.

“GATT’s failure would have exposed the United States and the world to a risk you just didn’t need” as an investor, notes Richard Rippe, economist at Prudential Securities in New York. That risk was the chance of a new slide toward protectionism, a la the 1930s experience that helped produce the Great Depression.

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Instead, with GATT, we get more of the things that make stock markets go up long-term:

* The faster spread of technology (for example, European tariffs on certain computer chips will be cut), which ultimately boosts business efficiency.

* Potentially lower inflation, because low-cost, high-quality farmers, manufacturers and service providers inevitably will benefit most from freer trade. And if inflation is low, interest rates also can stay low.

* The preservation of a world order that encourages cooperation rather than isolationism and extremism (Russia, perhaps, being the sad exception to the rule here).

Indeed, Morgan Stanley & Co.’s global stock strategist, David Roche, warned clients recently that the only smart investment he could name if GATT were to collapse was defense stocks--because they would be “the ultimate beneficiary of what would be the greatest political failure the world has seen since the last World War.”

From a global investor’s view, which stocks and markets win the most under the new GATT? Global fund managers say it’s far too early to call that. Many details must be worked out, and new tariff reductions will take years to phase in. For the most part, “these are not the kinds of changes that are going to produce benefits (for companies) overnight,” says Warburg’s Sharon.

But in general, Wall Streeters say the countries already heavily dependent on high-value exports, such as key European nations, have the most to gain as trade is liberalized further--assuming they have achieved their export status fairly.

The losers, at least short-term, could be those developing nations that have attempted to shield their industries with high tariffs on foreign goods.

Latin American countries, in particular, “have highly protected industries, and a low amount of manufactured exports,” Sharon notes. GATT will increase pressure on companies in those nations to restructure and boost efficiency or die.

But in many developing countries, that process is already in full swing anyway: Witness the widespread privatization of formerly state-owned businesses in Mexico, Argentina, Chile and other emerging economies.

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The United States, meanwhile, is seen as a big winner all around. Although Hollywood didn’t get the free access to media outlets that it deserved in Europe, the new GATT’s first-ever coverage of a large number of services--banking, securities, insurance, transport, tourism and telecommunications--is a potentially huge victory for America, the world’s leading service economy.

Moreover, this GATT “moves us in the direction of better protection of intellectual property rights” for the first time, says Abby Cohen, investment strategist at Goldman Sachs & Co. in New York.

The global safeguard of patents, copyrights and trademarks has long been an American goal. Our creativity, after all, is what has gotten us this far. GATT now will help stop the pirating of American know-how.

In short, GATT provides the framework for the way things should be: The smart, the brave and the inventive prosper; the rest fall by the wayside.