Foreign investors, who helped propel the long bull market in U.S. stocks, began dumping their shares when the market plunged on Oct. 19 and continued to sell more shares than they bought for the rest of the year, according to the Securities Industry Association.
In the final three months of 1987, foreigners were net sellers of $7.8 billion worth of U.S. equities, marking the first such shift in three years.
In November alone, foreign investors were net sellers of $6.7 billion of stocks. That was a dramatic reversal of earlier trading patterns; until October, foreigners had been net buyers of an average of $2.6 billion of shares a month.
Foreign investment in U.S. equities, especially from Japan, provided significant thrust to the bull market during the past several years. In 1987, foreign activity accounted for 12 percent to 14 percent of the public volume on the New York Stock Exchange, according to Carolyn Hildebrandt, assistant vice president at the SIA.
"As seen in the dramatic turnaround at year-end, foreign capital is not a never-ending stream of support for U.S. equity prices," she said.
Overall, overseas investment in U.S. stocks has increased dramatically. Net purchases, standing at only $4.9 billion in 1985, shot up to $18.7 billion in 1986 and were headed for another record in 1987 when the market cracked. It now appears that 1987 net purchases will end up by about $15.7 billion.
Although the SIA was unable to break down its fourth-quarter figures by country of origin, Hildebrandt said she thought much of the November's sales came from European investors.
Yoshindo Takahashi, president of the Nomura Research Institute (America), said that Japanese investors were "net sellers in October, neutral in November and net purchasers in December." He estimated that the Japanese now have $15 billion invested in U.S. stocks, only slightly less than before Oct. 19.
Kenneth R. Leibler, president of the American Stock Exchange, said the retreat of foreign investors during the post-October period was "clearly one of a half a dozen factors that have been negatives in the market."
Leibler said he saw a visible slowdown in foreign orders to buy and sell stocks, which usually come in at night and await the opening of the exchanges in New York.
"Foreign investors get a double whammy from the decline in the dollar and the decline in stock prices," he noted.
Foreign investors who held U.S. stocks for the last three years would have lost about 44 percent from the decline in the value of the dollar. And while stocks in the Dow Jones industrial average appreciated 107 percent by last August, they lost 35 percent during October's initial drop.
Institutional investors in the United States and abroad said foreigners will not return to U.S. stocks in force until they are convinced that the dollar has firmed.
"They are completely traumatized by the dollar," said Francois Sicart, president of the Tocqueville Fund in New York and an adviser to European investors. "You can give them all kinds of descriptions of the outlook for the economy but they are frozen into inaction by the dollar."
The view was not unanimous, however.
Augustin D'Aboville, president of Harwanne, a Paris investment bank, said there was a "general consensus" that the risk of holding dollar-denominated investments was now relatively small and that "within six months the dollar should be on the way up."
D'Aboville, who left U.S. equities, said he already had put 30 percent of his portfolio back into U.S. stocks.
On the other hand, Peter Pejacsevich, senior vice president at Bessemer Trust Co. of London, said European investors were pessimistic -- he thought overly so -- about the health of the U.S. economy and lacked confidence about how much vigor they would see in U.S. stock markets. Until that confidence develops, he said, stock prices were likely to remain in a narrow trading range.
Nimrod Fachler, head of the PaineWebber Atlas Fund, a global equity fund with $225 million invested, said that cash levels in many European funds are now at ultrahigh 30 percent to 40 percent levels. "They're loaded with cash but they're not investing," he said."
W. Donald Marr, deputy chairman of Dunedin Fund Managers, of Edinburgh, which manages $3 billion in pension fund and other monies, said, "We still find attractive companies to hold in the U.S. but we don't think Wall Street looks particularly cheap. So we're on the fence and cautious until we see the economic movement in the next few quarters."The slowdown in foreign investor activity has contributed to a general lag in volume on all three major exchanges. From January 1987, a month which saw a sharp rise in stock prices, until January 1988, New York Stock Exchange volume was off 5.4 percent, Nasdaq over-the-counter volume was off 18.8 percent and Amex volume was down 33.2 percent.