WORLD TRADE AT A CROSSROADS : Betting on NAFTA : Tip for Investors: Think Global, Not North American

Voting with their pesos and dollars, investors in Mexico, Canada and the United States cast a yea, a nay and a maybe for NAFTA on Tuesday, one day ahead of the long-awaited U.S. House vote.

In Mexico City, the Bolsa index roared to a new high, while stocks fell in Toronto and closed mixed in the United States, despite a blue-chip surge.

The seeming inability of North American investors to reach the same conclusion about NAFTA’s chances is probably a good allegory for what will happen after the House vote as well. That is, NAFTA or no NAFTA, North American markets may quickly go their separate ways.

Thus, for individual investors trying to decide how to play the trade pact’s passage or defeat, the best idea is: Don’t. In the short term, NAFTA won’t have much effect on the economies of the three nations. And any reaction in stock prices, up or down, is likely to be over quickly--certainly quicker than most individuals could hope to get on board or exit.

At this point, you’re much better off thinking long-term about your investment plan, and thinking truly international , not just about North American stocks, most Wall Street pros say.

Consider: While the conventional wisdom is that Mexican stocks should soar if the trade pact passes the House, the Bolsa index of the Mexico Stock Exchange has already rocketed 205.51 points, or 10.5%, over the past week. Speculators are clearly in that market in a big way, analysts say.

If those speculators follow the classic Wall Street line of “buy on the rumor, sell on the news,” the Bolsa could plummet from its record close of 2,159.35 on Tuesday even if NAFTA wins today.

On a broader scale, there is the issue of NAFTA’s symbolism. The fear is that its defeat could quash the move toward free trade worldwide--and spark a global bear market in stocks by forcing investors to downsize their expectations for economic growth in the 1990s.

Given that most world markets now sell for historically high price-to-earnings ratios, there is admittedly precious little room for disappointment in stock prices, almost anywhere.

In the United States, in particular, the short-term reaction could be brutal if NAFTA fails, because the nation’s image as a leader could be harmed both domestically and overseas.

Bill Wilby, manager of the Oppenheimer Global stock fund in New York, says that on a recent trip overseas, foreign business people reacted with amazement at the bitter U.S. debate over NAFTA. “They asked, ‘How could a country like the U.S. be afraid of free trade with a country like Mexico?’ ” Wilby said.

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Still, most stock pros advise investors to keep perspective, no matter what happens today in Washington. NAFTA simply isn’t the sole defining event of the rest of the century.

Longer-term, markets will adjust, and bigger, ongoing trends will be played out regardless: China’s emergence, Europe’s restructuring and Latin America’s recovery, among them. All are moneymaking opportunities, and all have already begun to unfold, even without broad free-trade agreements among nations.

Indeed, rather than trying to predict how individual companies, countries or regions might fare under freer trade or not-so-free trade, most pros advise, individuals should spread their money globally, via mutual funds that can invest anywhere.

With most markets worldwide already in a bull phase, you aren’t bargain hunting anymore, with few exceptions. That means the global investment game can only get tougher: Making big money will depend not so much on being in the right country or region, but on being in the right company --no matter where it might be located.

Happily, the heavy dollar flow into international mutual funds since midsummer suggests that many individuals already understand they don’t have the ability to pick and monitor individual foreign stocks, or individual country markets. They’re leaving that to the pros, and they’re betting on the concept of global diversification.

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For those investors who want to make a specific country bet, however, many Wall Streeters believe that Mexico remains a terrific buy regardless of what happens with NAFTA.

In fact, if NAFTA fails and the Mexican stock market dives, many pros say they’ll eagerly jump in. “Mexico was attractive before NAFTA came up, and it will be attractive afterward,” said Wilby.

The simple fact is that many American investors, and many foreign investors, view Mexico as a long-term success story whether or not the United States plays along with completely free trade. In a recent survey of European business leaders by UPS Europe Business Monitor, 37% of the executives named Mexico the North American country with the best investment potential, followed by 35% for the United States and 20% for Canada.

Michael Gerding, manager of the Founders Worldwide Growth fund in Denver, also points out that the defeat of this version of NAFTA wouldn’t necessarily mean the end of the concept. “I think we’d see another (renegotiated) NAFTA,” Gerding said, even though Mexican President Carlos Salinas de Gortari has said it’s this version or no version.

Finally, Mexico remains the most inexpensive emerging market in the world, notes Soraya Betterton, manager of the GT Global Latin America stock fund. The average Mexican stock sells for about 14 times its most recent 12 months’ earnings per share. So the risk of investing in Mexico today remains well below that of most other higher-priced markets, experts say. If NAFTA passes and optimism about Mexico rises further, it’s likely the market’s price-to-earnings ratio will rise as well.

An Expensive World

Using the classic measure of market valuation--stock prices relative to earnings per share--most world markets are high-priced today, experts say. Mexico is the exception.

Market price-to-earnings ratios, by country: Japan: 73 Canada: 63 Malaysia: 33 France: 26 Germany: 25 United States: 22 Singapore: 21 Britain: 21 Australia: 20 Thailand: 20 Hong Kong: 19 Spain: 17 Mexico: 14

P-Es based on most recent 12 months’ earnings.

Source: Morgan Stanley Capital International

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1993 800- Fund gain phone Vanguard Intl. Growth* +33.4% 662-7447 T. Rowe Price Intl. Stock* +31.0% 638-5660 Scudder Intl.* +28.8% 225-2470 EuroPacific Growth +28.2% 421-0180 Templeton Foreign +27.9% 237-0738 Vanguard/Trustees’ Equity International* +26.6% 662-7447 Scudder Global* +24.6% 225-2470 Putnam Global Growth A +24.5% 225-1581 New Perspective +21.5% 421-0180 Dreyfus Strategic World +12.4% 645-6561

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Source: Morningstar Inc.

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