** NY Times. THE EMERGING MARKETS: Uncovering Few True Deals in a Global Bargain Basement
nytimes.com
September 6, 1998
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By JONATHAN FUERBRINGER
Emerging markets are on hold.
After a decline that has seen the Morgan Stanley Capital International
index of emerging markets plummet 33 percent since mid-July, even
the "attractive" values that are peeking through the wreckage are still
too risky for some professional investors.
Consider Telebras, the Brazilian telephone company. In July, the
Brazilian government sold its controlling share to the public at a price
well above forecasts. Now the stock is down 52 percent since July
30.
William P. Sterling, the global
strategist at BEA Associates, an
investment management firm,
acknowledged that the plunge makes
Telebras tempting.
"The valuations are incredibly
attractive now," he said. "Typically,
when markets have been this cheap,
they have outperformed over the next
several years."
Even so, BEA is keeping its powder
dry. "The fundamentals are so
unsettling at the moment," Sterling
said, "it's easy to see good values
going down even more."
In an environment like this, tiptoeing
through the next couple of months will
be tricky for American investors. "It is
difficult to know whether this market
is damaged permanently or just for
the next six months," said Desmond
Lachman, the head of
emerging-markets economic research
at Salomon Smith Barney.
Mutual fund investors may not be
panicking yet, but they are pulling
some money out of emerging markets,
most recently in Latin America. Many
fled Asia long ago. If developments
scare investors even more, that will
just add to the downward pressure on
markets from Thailand to Indonesia,
Russia to Hungary and Mexico to
Brazil.
Total assets are down 25.5 percent
this year for the emerging-markets
funds that supply information to AMG
Data Services. Of this decline,
one-fifth is a result of investor
withdrawals. But the money is flowing
out much faster from Latin American
funds, where the average rate of
weekly withdrawals since June is
three times that from Asia and Pacific
funds. And emerging markets still face
tremendous problems that could set
off more selling:
DEVALUATION Columbia
effectively devalued its currency last
week and other currencies from the
Brazilian real to the Hong Kong dollar
are still under pressure. The threat of
devaluation of these currencies and
the Chinese yuan, which does not
trade freely, has not disappeared.
CURRENCY CONTROLS
Malaysia imposed such controls last
week, and restrictions could spread
elsewhere. Paul Krugman, an economist at the Massachusetts
Institute of Technology, has argued that such controls, although
generally regarded as unworkable, may be the only hope
emerging-markets countries have of cutting interest rates to stimulate
their economies without the fear of a new run on their currencies.
But restrictions also make emerging markets harder to exit and,
therefore, less attractive to outside investors.
A CREDIT SQUEEZE A surge in interest rates in
emerging-markets countries has already slowed economic growth
significantly and will keep it in check. These rates, now 20 percent or
more, make it harder for countries like Brazil to make interest
payments or refinance billions of dollars in debt. Moody's Investors
Service cut Brazil's debt rating last week sending stocks even lower.
JAPANESE MALAISE The Japanese government still has not
shown that it will carry out the policy changes that economists say are
needed to revive the nation's economy, like a broad tax cut and a
revamped banking system. Without a turnaround in Japan, rebounds
are not likely soon in other Asian countries swamped by the cascade
of currency crises in 1997.
RESCUE DOUBTS Given the collapse of Russia's ruble and
economy, it is unclear how the United States and its allies, along with
the International Monetary Fund, would respond if a country like
Brazil found itself on the brink. And the United States Congress may
not approve the injection of money that the IMF needs to keep its
bailout fund flush. Without a reliable global backstop, the risk in
emerging markets is much higher.
A COMMODITIES SLUMP Commodity prices are still weak,
just above 21-year lows. Oil, copper, gold and other commodities
are important revenue sources for the governments of many
emerging-markets countries, from Russia to Mexico, South Africa to
Chile and Zambia to Indonesia. Low prices make it harder for these
countries to sustain growth and control spending.
FEWER PLAYERS Many institutional investors in emerging
markets, including hedge funds that have lost millions in Russia and big
international mutual funds that had 10 percent to 30 percent of their
money there, have pulled out and "will not return for some time," said
Stuart S. Brown, who is in charge of emerging-markets research for
Paribas in London. "It will take an extended period of time for the
appetite to return in any significant way," he said.
Ron Chapman, the head of international equities at the Dreyfus Corp.,
who had trimmed his international fund's exposure to emerging
markets to zero, was sorry when he tried to identify a market low this
year. "We tried a couple times and decided quickly that we were
wrong," he said.
This means investors need a new approach. Throwing money at
emerging markets as a broad group is not advisable, analysts say. In
fact, the Morgan Stanley emerging-markets index has fallen in three of
the last four years and is down 42 percent this year.
Choosing countries carefully will be important, especially those that
are not well-known, analysts say. This includes checking where a
mutual fund actually has invested, not just relying on the fund's name.
When emerging markets begin to turn around, the profits, several
analysts said, will come from owning the right companies, selected not
only by their strength at home but also by how they match up with
their competition around the world.
Latin America is still the key to the overall outlook. Many analysts
fear that deepening problems in Russia and Asia will force Brazil to
devalue the real, which would probably set off another wave of
selling.
"The contagion has been savage," said Christopher D. Alderson, who
is in charge of emerging markets at Rowe Price Fleming in London.
Chapman of Dreyfus has been reluctant to test Brazil again for just
that reason.
But Joyce Cornell, the lead portfolio manager of the Scudder
Emerging Market Growth fund, is guardedly optimistic. "I think we
are going to look back on this period as a wonderful buying
opportunity," she said. But though she is doing some buying in
Mexico, including stocks like Fomento Economico Mexicana, the
large beverage company known as Femsa, she is avoiding riskier
areas like Brazil.
Asia is also off limits, in Mrs. Cornell's view. "Asia is not worthy of
much serious investment for some time, and I mean a long time," she
said.
A region that should do well, she said, is central Europe, including
Poland and Hungary, despite the fact that markets there have all been
down this year. Although the countries are situated close to Russia,
Mrs. Cornell said, their main trade links are with the European
Community.
She also likes the Middle East, including Egypt (down sharply) and
Israel (off less), and some countries that get even less attention, like
Ghana and Morocco. The Moroccan stock market has actually
posted gains during the recent crisis, and Ghana has held steady; each
is up significantly in dollar terms for the year.
"That gives you a lot to choose from," she said, even if her list omits
the big-name emerging markets.
Still, times are tough, even for savvy investors who steer clear of the
craters. Mrs. Cornell never had any money in Russia, and she made
an early exit from Asia, meanwhile turning up winners in the outback
of emerging markets.
She got a lift from Portugal, which is up 31 percent this year and is
still classified as an emerging market for a few more months even
though it is joining Europe's single currency in January. But with all
that, Mrs. Cornell's emerging-markets fund, while outdoing most of
her competitors, is down 28.3 percent for the year.
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