SAN JOSE, Calif. -- Worried about the direction of the U.S. stock market and willing to place a bet on the global economy? Remember, U.S. stocks are hardly the only game around. There are thousands of stocks in scores of markets worldwide -- and emerging markets, in particular, are hot again.
Markets in these rapidly growing but still-developing nations often swing wildly. They fared poorly in 1994 and 1995. But they're rising again in 1996. And this time, unlike the last emerging market rally in 1993, the upturn should be durable, most pros say.
From Taiwan to Malaysia to Mexico to Argentina, stock prices are cheap. In Latin American markets, which are especially popular, interest rates are falling and exports are rising -- and the battered Mexican economy finally appears to be on the mend. Emerging markets always pose substantial currency and political risk. Still, the average emerging market fund was up more than 14.1 percent through June 6, nearly 2 percentage points more than the average domestic growth fund, according to Lipper Analytical Services.
None of this is really surprising. These funds invest in stocks in hyper-growth countries, such as Argentina, Malaysia and Singapore, many of which are virtually certain to grow at least twice as fast as the United States and other developed nations in coming years. "My mother is 65, and I just convinced her to invest a bunch of money in my fund," says Mark Madden, portfolio manager of Pioneer EmergingMarkets. "I wouldn't do that if the fundamentals weren't extremely attractive."
"Over the next five to 10 years, emerging markets will probably provide the best returns of any stock markets in the world," adds Craig Litman, co-editor of No-Load Fund Analyst in Orinda, Calif.
Problems began plaguing emerging markets in 1994. After they soared 72 percent in 1993, investors began worrying the stocks were overvalued and pulled much of their money out. Emerging markets began rebounding in March 1995, but they still did badly for the year because a sharp devaluation of the Mexican peso in December 1994 decimated most emerging markets in the first two months of 1995.
Now the script is changing. The Mexican economy contracted 7 percent last year but is predicted to grow as much as 2.5 percent this year, largely because of rising exports and a $20 billion U.S. loan. Major Latin American markets are also benefiting from declining interest rates and relatively low-priced issues.
Josephine Jimenez, senior portfolio director of Montgomery Emerging Markets Fund, says emerging markets, on average, are selling at 15 times projected 1996 earnings -- compared with projected earnings growth of 20 to 30 percent and an historical price/earnings ratio of 18. Yet another plus, say Jimenez and others, is the relative strength of the U.S. economy and economic recovery in Japan, which is spurring exports from emerging market nations.
Savvy investors should weigh the special risks of emerging markets, however. There is substantial currency risk, especially in Latin America, where central banks historically have been prone to print money and ignite almost unimaginable inflation. Equally unsettling are the political risks in developing market economies.
In South Korea, for example, the market dropped 7 percent last October following the arrest of two past presidents on fraud charges. Yet another problem is the lack of liquidity in most emerging markets, which can sharply exaggerate the moves of a handful of big investors.
"The younger the market, the greater the inefficiencies and the greater the volatility," says Michael Hoffman, portfolio manager of Robertson Stephens Developing Countries Fund.
What's a serious investor to do? Limit your exposure to emerging markets to 15 percent of your mutual fund portfolio, most experts advise, and stay put at least five years. "Invest in an emerging market fund," Jimenez says, "but don't look at it as a way to buy your wife a red Porsche this Christmas."
Pub Date: 6/23/96