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Investors looking overseas ought to consider Brazil


INVESTORS WHO have squeezed all they can out of domestic stocks might want to throw some of their winnings into the international market.

Financial experts advise that a portion of every portfolio should contain some international stocks. And Joseph C. Williams has just the country investors should consider. It isn't Japan, Germany or the United Kingdom, but Brazil.

Williams is director of emerging markets for Batterymarch Financial Management Inc., the Boston-based subsidiary of Legg Mason Inc. He's responsible for a team of six employees who manage about $1.3 billion in assets for Batterymarch, which Legg Mason acquired in January 1995.

He also manages a $600 million offshore fund and oversees Legg Mason International Equity Trust and Legg Mason Emerging Markets Trust, two new mutual funds that have $110 million and $20 million in assets under management.

Brazil, he says, is one of the most inexpensive large emerging countries in the world when comparing its price tag -- the average price-to-earnings ratio of all of its publicly held companies -- with other countries.

The ratio works out to 10 times earnings, cheap when compared with Japan's ratio, which is about 35 times earnings. Williams expects the average Brazilian company to grow in the 20 percent range in 1997.

"Between the growth rate and the PE, we get a number that says you've got to pay attention here," he said. "The story is just so good. "

Williams likes Telebras, a holding company for all of the Brazilian state telephone companies. "This has been a wonderful stock," he said.

Its shares have shot up more than 70 percent to the $70-a-share range since the beginning of the year. But it's a stock Williams wouldn't recommend to an individual investor because it has climbed so high.

He also likes Coteminas, a cotton T-shirt maker that has benefited from cheap labor and modern equipment.

Batterymarch is known as a quantitative analysis firm. It selects its investments through computers that pore over reams of company data that measure income performance, stock price and analyst estimates.

But Williams finds it equally important to get out of the office and into the field. And that is what he has done in Brazil.

"We do a lot of tire kicking. The smell test is an important part of the decision process," he said.

What sold Williams on Brazil is the taxi drivers. He traveled to Rio de Janeiro in the late 1960s, and cab drivers were eager to trade the real for dollars. On pay day, cabbies raced to stores to buy groceries and clothing because they feared that inflation would erode the value of their money before they could spend it.

But when he returned 30 years later, the cab drivers weren't as willing to trade for dollars and they no longer rushed to the stores on pay day because inflation had been tamed. They were also spending more money.

Cab drivers "can buy more things like washing machines, cars and televisions," he said. "That is the sort of sniff test that helps you say there is opportunity here."

But why gamble on overseas markets, especially when the U.S. market has been laying golden eggs for the past two years?

Williams, who says he's no expert on the domestic stock market, thinks it's too high, while overseas stocks are cheap and offer plenty of growth.

"The reason we look overseas is so many of our products that we buy in the States are made overseas, so you might as well participate in the profitability of those companies," he said. "In the case of emerging markets as opposed to developed markets, the cost of capital is so high, which means they are going to pay you a higher return for the use of your capital."

Many foreign companies are just as profitable and well-run as U.S. companies, too.

"The risk is much more of your view of the direction of the dollar," Williams said. "If you buy a security and the yen goes down and you want to sell the security back for dollars, you are taking a currency risk unless you hedge."

That's why Williams says the best way to invest in overseas companies is through mutual funds. Morningstar, the Chicago-based mutual funds rating firm, says there are 903 mutual funds that specialize in investing in foreign companies.

"You start buying overseas and you've got to find out who's going to hold your shares," Williams said. "How are you going to get the prices and access to the market? Do you buy a foreign currency at the bank and send it to a broker you have never met and ask him to buy a Taiwanese stock? It is fraught with risk."

Pub Date: 12/30/96

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