(MONEY Magazine) – When health officials in Hong Kong ordered the slaughter of the island's 1.3 million chickens this past January, a cynic might have expected New York Stock Exchange traders to start hoarding Chicken McNuggets.

Such is the linkage that many people now believe exists between Asian and Western markets. Reinforcing that belief, the recent turmoil in Hong Kong, Indonesia, Malaysia, South Korea and Thailand has brought the U.S. market advance to a halt. Since reaching an all-time high of 8259 in August, the Dow Jones industrial average has gyrated like a dragon in a Chinese New Year's parade, briefly dipping to 7580 in mid-January. The Dow's behavior makes sense, say some pros, given that part of the U.S. stock market rise over the past seven years has been fueled by expectations that Asia's fast-growing Tiger economies would produce big profits for American exporters. Says Arthur A. Micheletti, chief economist for the San Francisco investment advisory firm Bailard Biehl & Kaiser: "You can't climb on the back of economic expansion in Asia and not expect a rough ride when that expansion slows or stops."

On Main Street, however, a lot of investors still have a more bullish outlook. After seven years of uninterrupted growth in GDP, they note, the U.S. economy still seems robust: Unemployment, at 4.7%, is the lowest it's been in 25 years, while consumer prices are rising at a glacial 1.7% a year. Profits for companies in the benchmark Standard & Poor's index of 500 stocks aren't expected to match their 12.6% average annual earnings increases of the past five years, but they are forecast to gain a respectable 6.6% in 1998--and to replicate that performance each year through 2002.

So who's right--pessimistic investors who think the Asian flu will send U.S. stocks into intensive care? Or market watchers like Al Kugel, senior investment strategist at fund company Stein Roe & Farnham in Chicago, who expects the average stock in the S&P 500 to return about 10% in 1998?

Of course, we can't predict Asia's future. But we can explain the extent to which global economic forces are likely to affect you. In brief, Asia's woes will almost certainly mean lower returns for U.S. investors over the next few years--but the impact will not be as great as many now fear. This story explains why that is so but also provides some ways to protect your portfolio from Asian contagion. Further on in this section we examine the opportunity to buy cheap stocks in emerging markets. Before you do any bargain hunting, however, check out MONEY Wall Street editor Michael Sivy's contrarian case for avoiding foreign stocks altogether.

Let's start by putting Asia's problems in perspective. Although Americans have poured more than $100 billion into mutual funds that invest overseas during the past two years, the overwhelming majority of individual investors' liquid assets--stocks, bonds and mutual funds--is still squirreled away in the U.S. For example, less than 20% of the money in U.S. stock mutual funds is invested overseas. Of that, more than a third is concentrated in Western Europe; Southeast Asia accounts for about a fifth.

Indirectly, though, what happens in Bangkok, Berlin and Buenos Aires has a considerable effect on American pocketbooks and portfolios. "Globalization"--unlike "synergy"--is a business buzzword that really means something. Falling trade barriers and the free flow of money from one country to another are making the world's economies increasingly intertwined and interdependent. "The U.S. has the capital and technology, but the rest of the world has the labor force and consumer demand," says William Holzer, manager of the $1.5 billion Scudder Global Fund. "We need them as much as they need us."

The most obvious need for U.S. companies is export markets. As the dollar strengthens against foreign currencies, American products become increasingly expensive for overseas businesses and consumers. This is bad news for many of this country's largest and best-known companies, which depend on foreign markets for a hefty chunk of their sales and profits. Not only will demand for their products fall but so will profits on what they do manage to sell when revenues earned in weak foreign currencies are converted into U.S. dollars.

Already, companies of all stripes have begun to feel the pinch: In January, Philippine Airlines canceled a $600 million order for four 747 jumbo jets from Boeing, which generates better than 40% of its revenues outside the U.S. And Boise, Idaho-based J.R. Simplot, which exports roughly 4 million pounds of freeze-dried french fries a week to Asia, reports that shipments to Korea have dropped by almost a third in recent weeks. "There's no question that companies heavily dependent on Asia for business are going to be hurt," says Maureen Allyn, chief economist for Scudder Kemper Investments in New York City. Among the seemingly vulnerable: door-to-door cosmetics hawker Avon Products (which generates roughly two-thirds of sales and profits outside the U.S.), consumer-products giant Colgate Palmolive (68%) and McDonald's, where Big Mac fanatics outside the U.S. account for 57% of pretax profits.

But as the charts opposite illustrate, U.S. industry is a lot less dependent on exports to Southeast Asia or anywhere else than you might expect from reading recent headlines. According to an analysis by Morgan Stanley Dean Witter, the typical company in the S&P index of 500 stocks produces about a third of its sales and profits outside the U.S. Overall, exports account for only 12% of total U.S. gross domestic product (GDP), with Southeast Asia representing about a fifth of that, or 2.3%. Western Europe, which imports the lion's share of U.S. goods, is in the midst of an economic recovery that shows no signs of faltering. Explains Rosemary Sagar, head of international investment for U.S. Trust in New York City: "Europe is a good cushion. Resurgent economies there have the capacity to absorb some of the impact of a drop in exports to Asia." Better still, the largest single importer of U.S. goods--Canada, with 21% of the total--is also in the midst of a rebound.

So, with its biggest export markets healthy, the U.S. economy's vulnerability to Asia's troubles is serious but hardly life threatening. Even if problems in Asia cause American exports to that region to drop by 20% this year--which BBK's Micheletti thinks is likely--the net effect will be relatively small: a one-fifth decline in a region that (including Japan) accounts for just a third of U.S. exports, which in turn accounts for slightly more than an eighth of the U.S. economy. That adds up to about a 7% decrease in exports, presuming shipments to the rest of the world stay the same. But economist Allyn is looking for overall export growth this year of about 9%, thanks to strong demand in Europe and elsewhere for U.S. goods and services.

So why has the stock market reacted so dramatically to the bad news from Asia? The driving force on Wall Street is expectations, not absolute numbers: Many companies' stocks have soared on investors' belief that profits will keep growing rapidly. But if that growth slows, even slightly, the rationale for a company's towering stock price disappears. That's what happened with technology companies such as Intel, which generates nearly 60% of its sales overseas. Concerns about Asia helped knock the stock from a high of $102 in August to $67 in December, as analysts ratcheted down their profit predictions. But Intel's shares rebounded to $77 by late January, on fourth-quarter earnings that were lower than 1996's but above analysts' expectations.

Of course, things could get a lot worse if Asia's woes jump to other vulnerable economies in Eastern Europe and Latin America. But most economists view that as unlikely, if only because international bankers are scrutinizing other developing-nation hot spots more closely. Most forecasters have revised their predictions to reflect an overall decline in U.S. GDP of just a half to three-quarters of a percentage point. That still means growth of about 2.8% this year--down from an estimated 3.8% in 1997 but roughly in line with the annual rate of expansion that the country has enjoyed since the last recession in 1991.

The big lesson is that although events in foreign markets definitely have impact, measuring that impact can be very tricky. An example: Dell Computer. On the one hand, the Round Rock, Texas maker of personal computers depends on foreign markets for nearly a third of its roughly $16 billion in annual sales (7% generated in Asia). But Dell also buys more than two-thirds of its component overseas. So even if weak international demand cuts into sales, falling component prices could strengthen the company's competitive position. In January, for example, Dell lowered prices on many of its office computers by 15%, noting that it was "passing on reduced component costs" attributable at least in part to weakness in Asian currencies. Says Stuart Hoffman, chief economist for PNC Bank in Pittsburgh: "In some countries the dollar has twice the buying power it did a year ago."

Sounds pretty good. But Dell is precisely the kind of stock most vulnerable to modest changes in expectations on Wall Street. So where does that leave investors? The wise course is to focus on what we can know with precision: that the best-situated companies today are those that 1) will benefit from lower interest rates and increased consumer spending in the U.S., 2) aren't especially dependent on exports and 3) won't be squeezed by competition from newly cheap imports.

Need a few hints? J.P. Morgan equity strategist Doug Cliggot--who thinks U.S. stocks will return 10% to 12% this year--has assembled a short list of industries with those characteristics and stocks that are worth considering now: cable-television operators (such as $5.5 billion Comcast and $7.8 billion Tele-Communications Inc.), regional phone companies ($31.5 billion Bell Atlantic and $26.8 billion SBC Communications), restaurant operators ($2.2 billion Wendy's International), grocery and drugstore chains ($24.8 billion Safeway and $14.4 billion CVS Corp.) and hospital management chains ($3.8 billion HealthSouth Corp. and $10 billion Tenet Healthcare). Says Cliggot: "The U.S. and global economies are a tapestry. When some of the threads are starting to fray, it's not a bad idea to look for others that aren't as connected to ones that are coming loose."