BusinessWeek. FOR EMERGING MARKETS, 'PURE CARNAGE'
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And for market makers, a major
shakeup seems almost certain
If you want to check the pulse of the emerging-markets securities business,
Merrill Lynch & Co.'s trading desk in London is a good place to start. There,
Robert A. Butler, an angular, 34-year-old Scot, presides over the trading in
''emerging Europe'' stocks. Ever since Moscow defaulted on its debt on Aug. 17,
Butler and his colleagues on the desk have been run ragged helping clients dump
once fashionable Russian stocks such as energy giant Lukoil and Mosenergo, the
big utility. At the same time, the Polish and Hungarian stocks that Butler's desk
trades have been beaten to a pulp. ''We have seen two weeks of pure carnage,''
he says.
By Sept. 1, the frantic trading has subsided, giving Butler time to survey the
wreckage. It is not a pretty sight. The Russian index is down more than 50% in
the past month to a record low, while Poland and Hungary are not much better
off. Trading in Moscow is almost dead. On one recent day, a single trade worth
$37,000 went through the Russian trading system during the usually frenetic
opening hour.
Merrill and other offshore market makers are still open for business. On Sept. 1,
Merrill did $15 million to $20 million in Russian stock trading--a decent day's
work. But the business has changed. Before the recent battering, Butler had been
taking orders from big clients such as mutual funds and pension managers, which
wanted stakes in what seemed one of the great emerging markets. But recently,
such former enthusiasts, as well as hedge funds scrambling to meet margin calls,
have been selling at just about any price.
Butler and other emerging-markets pros have few illusions about the future of
their industry. Since just about every emerging economy from Thailand to
Venezuela has taken a drubbing, a major shakeup of the business seems to be in
the cards. ING Barings Ltd., once one of the biggest emerging markets players,
announced some 250 layoffs in emerging-markets earlier this year and just vowed
to reduce costs by a further 25%. ''Every financial institution is going to take a
close look at how they want to conduct their business,'' says Marcus A.L.
Everard, head of the emerging-markets client business at Credit Suisse First
Boston Corp. A pioneer in Russian investment banking, CSFB admits to a $254
million cut in profits thanks to Russian turmoil, and Eve-rard acknowledges this
could widen if markets sag further.
Of course, investors have also taken big hits. Long-Term Capital Management,
the $2.3 billion hedge fund managed by former Salomon Brothers Inc.
Vice-Chairman John Meriwether, lost 44% of assets in August. At least four
hedge funds heavily invested in Russia have filed for Chapter 11 bankruptcy
protection, according to Nicola Meaden, president of TASS Management Ltd.,
which tracks the industry in London. Three of those, with $180 million to $200
million in capital, were managed by McGinnis Advisors in San Antonio. ''We
were not aware that we had this kind of [default] risk because it is
unprecedented,'' says Dana F. McGinnis, the company's president.
NO RETURN? With many emerging-markets funds down 50% or more in the
past 12 months, investors are certainly on notice about the dangers now. One of
the most respected hands in the business, Peter R. Geraghty, former head of
emerging markets at ING Barings, wonders if burned investors will come back as
quickly as they did after Mexico's financial collapse in 1994-95 rocked the
world's smaller markets. ''There's a fundamental disappointment with
performance,'' he says.
For one thing, in recent years, just about every small market from Egypt to
Zimbabwe has been hawked to investors, so firms won't be able to use novelty to
hype securities. Even if investors do return, they may commit less money and
stick to the bigger markets, such as Brazil and Hong Kong, Geraghty reckons.
He also bets that with so many companies in financial trouble, private equity and
bonds may turn out to be the way the emerging-markets game is played, eclipsing
investing in stocks. He is about to go to work building a bond portfolio for
Washington-based Darby Overseas Investments Ltd., the emerging-markets firm
headed by former U.S. Treasury Secretary Nicholas F. Brady.
Having endured the chaos of the past few weeks, it is tough for traders to believe
investors will come trooping back. Why should people buy Lukoil when IBM is
so much cheaper than a few weeks ago? asks Butler. It is a question that any
company or country scrambling for capital is going to have to answer.
By Stanley Reed in London
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Updated Sept. 3, 1998 by bwwebmaster
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