Emerging Markets Get Fresh Look;
Brazil May Spur More Rebounds
By SARA WEBB
Staff Reporter of THE WALL STREET JOURNAL
From Thailand to South Korea to Russia, emerging markets have toppled like dominoes over the past 18 months, shaking up world markets in the process.
But now Brazil's surprising rebound from a currency crisis that only last week sent its stock market falling and disrupted global markets anew has prompted a fresh look by some investors at other emerging markets.
World stock markets continued to greet Brazil's devaluation favorably Monday. The Dow Jones World Stock Index rose 1.95 points, or 0.96%, to 204.96. Among major markets, gains ranged from 3.1% in London, 2.5% in Hong Kong, 2.1% in Germany and 0.5% in Japan. U.S. stock and bond markets were closed in observance of the Martin Luther King Jr. holiday.
Monday, Brazil's central bank said it would continue to let its currency trade freely, sending the Brazilian stock market up another 5.4% in the wake of Friday's spectacular 33% rally.
Fears that Brazil's currency, the real, would be devalued swept the markets last week until the central bank decided on Wednesday to widen the currency's trading band and then on Friday to scrap its fixed exchange-rate policy altogether.
Emerging markets first started to turn sour in 1997, when Thailand's devaluation of the baht on July 2 set in motion a series of currency-devaluations across most of Asia that rocked world markets in October 1997 and August 1998. After the devaluation of the Russian ruble in August, the spotlight turned on Brazil as the next likely victim.
These days, successfully timing a reentry into emerging markets "is very difficult," said Leila Heckman, managing director of global-asset allocation at Salomon Smith Barney in New York. For many investors, she added, it makes more sense to set aside a set percentage of investments for emerging markets in the hope that "when they go for a run, they go big."
Some international investors say it's still unclear whether Brazil is out of danger yet. Many of them are waiting to see what progress is made this week by Brazil's Congress on its fiscal and structural reforms. That, in turn, could influence how other emerging markets respond.
"The extent of contagion depends on the extent to which things go wrong in Brazil," said Michael Hughes, a director at Fleming Asset Management in London. "If things really go bad in Brazil, then it could be an influence on other emerging markets." In his view, the disaster scenario is "where you see a collapse of the real, leading to high inflation, a default on debt, and Brazil out of control-that would cause problems for Argentina."
Some investors and analysts fear that the real could plunge against the dollar. "The history of uncontrolled devaluations shows that they [the currencies] tend to overshoot on the down side," Mr. Hughes said. He said he would be worried if the real settled at around 1.80 to the dollar.
Geoffrey Dennis, global emerging-market equity strategist at Deutsche Bank in London, reckons the real could fall to 1.80 to the dollar and could then rebound to trade at around 1.50 reals to 1.60 reals against the dollar. Monday, the real continued to decline against the dollar, ending at 1.59 reals per dollar, compared with 1.47 reals per dollar Friday and 1.32 reals per dollar on Thursday.
But if the real does fall heavily, other countries' currencies could look vulnerable, said Bob McKee, economist at London-based research group Independent Strategy. "The ones that look vulnerable are the ones with fixed or pegged currencies, such as Argentina, China and Hong Kong," as well as South Africa, Mr. McKee said.
What investors such as Mr. Hughes of Fleming Asset Management hope is that Brazil's currency won't slump, and that the country will be able to lower interest rates, reducing the debt burden and cutting the fiscal deficit. The problem, Mr. Hughes said, is that "it's too early to tell which way it will go."
James Clunie, investment manager at Murray Johnstone International in Glasgow, said it's an issue that "we've been thinking about a lot recently. It's not clear, but given the cheapness, we're holders and buyers of emerging markets," such as Brazil, Chile, Mexico, Argentina and South Africa-even for portfolios that do not have to be invested in emerging markets.
In Asia, Mr. Clunie is focused on two of the better-developed markets, Hong Kong and Singapore. "You have to ask yourself, do you buy things regardless of the tricky situation?" he asked. "These are good companies, it's a shame about the country."
Already some of the Asian stock markets have rebounded from their lows, making big gains in the fourth quarter of 1998 thanks to more-stable currencies and lower domestic interest rates. But even with gains of more than 100%, the markets are still well below their earlier highs, particularly in U.S. dollar terms.
"Asia should continue to outperform," said Mr. Dennis of Deutsche Bank. "This is not the start of another round of currency weakness, I think Asia will hold up pretty well. But the question is, are we going to get any contagion in Latin America?" While he's concerned that currencies such as the Mexican peso will come under pressure, "we don't think there will be the kind of currency wildfire that swept through Asia."
|
