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The business economist at work: a view of international economics from Paris.

IT IS AN impossible job: Analyze the world outside the center of the universe (the U.S.) for professional managers of financial assets invested in different markets and currencies. But trying to forecast major turns in economic, interest and exchange rate trends, as well as national politics, is endlessly challenging, humbling and fascinating.

The external role of Smith Barney's chief international economist has evolved significantly since we began in Paris sixteen years ago, reflecting the remarkable internationalization of professional asset management. The handful of American international economists in the mid 1970s directed their efforts almost exclusively to U.S. institutional fund managers with portfolios invested mostly in Fortune 500 companies, many of which had significant earnings from overseas operations.

Understanding the outlook for those foreign earnings grew increasingly important, especially with FASB-8, implemented in 1976 (replaced by FASB52 in 1981), which required those companies to take into account the balance sheet impact of exchange rates on assets and liabilities, including inventories. Even more important was the dollar's shift in 197173 from being the gold-linked, fixed-rate kingpin of the Bretton Woods international monetary system to floating on the waves of market perceptions.

The dollar has experienced monumental volatility since the late 1970s: it dropped 31 percent against the DM between June 1976 and June 1980, rose 83 percent by the 1Q1985, then collapsed 54 percent by early January 1992. These massive shifts made it even more imperative for fund managers to look beyond U.S. borders.

The ERISA legislation of 1975, by requiring increasingly prudent management of U.S. pension assets, also contributed indirectly to asset diversification to reduce risk. Investment in "foreign" equity and bond markets became another option open to fund managers. Although the basic justification was, and remains, to limit risk, they were equally aware that internationalization could also increase opportunities and returns, especially if they got exchange rates right.

The steady shrinkage of the U. S .'s relative weight in the world economy also enhanced the importance of investing globally. From more than 50 percent of OECD countries' aggregate GDP/GNP in the 1960s, it is down to 33 percent today. This trend continues as the economies of other OECD countries and new regions (Southeast Asia, Eastern Europe, Latin America and now the Soviet republics) develop more rapidly than the U.S.

Abroad, the 1980s was a remarkable decade for international investing with elimination of foreign exchange and capital controls, deregulation of European and Japanese equity and bond markets, development of derivatives, massive privatization of state assets and growing market liquidity. Since 1985, these trends spread even to the fast-track nonOECD countries, leading to an explosion of new "emerging country" equity markets in Asia and, most recently, Latin America and Eastern Europe. These changes sometimes produced amazing gains -- Mexico's boisa shot up 325 percent in 1990-91. These markets are increasingly attracting institutional funds.

The sheer relative weight of the burgconing investments of American and growing numbers of other foreign fund managers diversifying into these sometimes small markets means their demands for better information, clearing procedures and liquidity are increasingly taken into account. The international domination of the major U.S.-English accounting firms also promoted more transparent and informative Anglo-American corporate reporting standards in many of these markets.

All these developments continue to reinforce the logic of globalizing institutional assets to avoid excessive vulnerability to a single market's weakness while profiting, with luck, from other markets' strengths.


Growth of the global investment "village" has sharply increased the number of fund managers and their need to divine these markets' outlook by forecasting inflection points of economic growth, exchange and interest rates. The demand for international economic information and analysis has thus grown dramatically in the past decade, stimulating explosive growth of the international economists' fraternity.

We find the multimarket, multicurrency asset manager must focus primarily on: the exchange rate risk, the single most volatile and potentially devastating/rewarding factor for global investors; shortterm interest rate changes; and the economic environment for future corporate earnings. These factors count heavily in the weighting of different markets in overall portfolios, i.e., the market allocation process.

Daily contact with global managers has led us to focus on the medium-term (beyond one quarter) exchange rate outlook, changes in the direction and rate of economic growth and inflation rates, interest rate trends (monetary pressure always being critical to markets' short-term performance), and monetary-fiscal policy changes. National politics, elections and major geopolitical changes of the sort happening since the Berlin Wall fell are also high on their list.

Our principal information sources are, not surprisingly, the central banks, government ministries and statistical offices of the major market countries; the private sector economic institutes; the OECD, IMF, European Community (E.C.) Commission, GATT, the U.N. Economic Commission for Europe; the specialized international economic' financial press and news agencies; and consensus forecast publications.

In addition to thirty years of personal contacts, our most valuable research resource is hundreds of country and subject files bulging with clippings and reports from all sources since the 1970s. (Our biggest challenge today is how our Paris staff of two, plus a part-time assistant, can deal with mountains of reading plus rapidly proliferating dossiers). We depend heavily on weekly economic indicators on fourteen major market countries compiled from numerous sources, including WEFA and Datastream.

Relying on our full-time Tokyo economists' forecasts for Japan, we 'conscientiously produce macroeconomic forecasts on Europe's principal countries, using a rudimentary economic model. Primary among the information and forecasting sources that we respect are the analyses and interlinked model forecasts of the OECD, the E.C. Commission and the IMF.

(The presence of the OECD, together with the International Energy Agency (IFA) and IMF-World Bank's European headquarters, make Paris a resource-rich base for an international economist... not to mention the Parisian lffe style.)

Detailed macroeconomic analysis, while necessary to maintain credibility for one's own forecast, is not, however, welcomed by clients in written reports, telephone briefings and meetings (which mean three-to-four months of travel a year). Clearly, they prefer a judgmental and critical analysis of consensus, most likely and "off-the-wall" scenarios. And clients appreciate personally annotated, dataintensive written products that focus on specific but changing international economic issues. Another well-received product is nutshell summaries of the political-electoral situation in some forty significant countries, accompanied by the timing of the next election and results of the last.


The international economist's internal role in Smith Barney includes being on the Investment Policy Committee (IPC), giving his views weekly to senior colleagues from the Research, Sales and Trading Divisions. A forum for developing ideas, tactics and strategies for the firm's investment policy posture, the IPC recommends portfolio asset allocations for a model U.S. portfolio and a "Buy List" of American and, increasingly, international equities.

The IPC is sensitive to the impact of international developments on U.S. markets, interest rates, exports and corporate earnings. Moreover, top management's commitment to gradual "globalization" of research analysts' company coverage requires more frequent information and forecasts on international economic, interest and exchange rate trends for the domestic research staff.

As a board member of several Smith Barney international subsidiaries, our views are taken into account on expanding internationalization of existing overseas banking, investment funds and fund management activities in Europe, the Middle East, Asia and Latin America.


The external and media relations function of Smith Barney's international economist has developed as well. This means speaking with U.S. and European journalists representing variegated publications -- a time-consuming job but rewarding for the firm's name. Speaking assignments include meetings of NABE, its European counterparts and other professional groups. Some international organizations, such as the International Chamber of Commerce, also invite suggestions on economic issues. Contributing regular economic, interest and exchange rate forecasts to monthly consensus publications is also part of this function.


Having the world for your "beat" and Paris as your base is both enviable and intimidating. As global institutional investment grows, spreads into the smallest markets, and becomes ever more sophisticated, the complexity of counseling fund managers on market allocation, exchange and interest rate trends and economic forecasts grows more challenging... and stimulating ! * J. Paul Home is International Economist and a Managing Director of Smith Barney, Harris Upham & Co., Inc., Paris, France.

International investing has expanded as the internationalization of professional asset management has increased and the relative weight of the U.S. in the world economy has shrunk. Clients require knowledge or estimates of inflection points of economic growth, exchange and interest rate expectations and the economic environment for future corporate earnings in major countries throughout the world. Information sources are both governmental and private, using personal contact and extensive country and subject files. Communication with clients is through written reports, tele'phone briefings and meetings. Internally, the economist is a member of the firms Investment Policy Committee. As global investment grows, so also does the complexity and the fascination of the job.
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Author:Horne, J. Paul
Publication:Business Economics
Date:Apr 1, 1992
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