Cover Story: WHERE TO INVEST: GLOBAL STOCK MARKETS
THERE'S GOOD HUNTING ON BOURSES ALL OVER THE WORLD
This was supposed to be the year that global stock investors steered into safe harbors. A slowing economy in the U.S., deflation in Japan, and the Mexican market meltdown had forecasters predicting a yawn of a year, with the world's major markets moving sideways at best. Instead, the Dow Jones industrial average is pushing the 4500 envelope, many of Europe's markets are actually up a bit, and investors are recovering from the "tequila effect" that frightened them away from emerging markets.
Global stock gurus are now remarkably upbeat for the second half. For one thing, the gradual economic slowdown in the U.S. and Europe is being widely heralded as good news: With inflation tame, central banks are increasingly likely to cut interest rates later in the year. And many market watchers believe the worst is over for the dollar. Recent central bank intervention to stabilize the greenback seems to signal that authorities don't want to see it go much below 84 Japanese yen or 1.4 German marks.
CLEAN SHEETS. A stronger dollar would come as good news for Japan (page 98), where the high yen has aggravated a dramatic economic slowdown and helped push the Nikkei stock average down 20% this year alone. A dollar bounceback would certainly help Europe's exporters--the only engines of recovery on the Continent so far. But even if you don't think the buck has hit bottom, there are reasons to be bullish on Europe's markets, down about 10% on average over the past 12 months. Talal Shakerchi, manager of the European portfolio at Old Mutual Portfolio Managers Ltd., thinks equities will get a boost from stronger U.S. cash inflows.
Shakerchi also believes German interest rates will come down--and that will be good news for financial stocks across Europe. His favorites include the Scandinavian banks--Skandinaviska Enskilda Banken and Svenska Handelsbanken in Sweden, and Den Norske Bank in Norway. After the real estate disasters of the early 1990s and government moves to take bad assets off the books, "these banks have extremely clean balance sheets, and they're unlikely to make the same mistakes anytime soon," he says. S-E Banken and Handelsbanken currently trade at price-earnings ratios of 4.9 and 5 respectively, compared with a European bank average of 11.8.
Elsewhere in Europe, Shakerchi likes Austrian power utility Verbund. Its p-e ratio is below 10, vs. a European industry average of 11.5. He also is buying Austrian brewers Brau Union and Ostbrau for their growth potential. And he recommends Swiss insurer Bloise: It's selling at a 40% discount to the value of its assets and may be a takeover play. Indeed, Marcus Grubb, who heads global equity strategy at Swiss Bank Corp., thinks stocks are nicely priced in several major European markets. Grubb likes Germany, where Frankfurt's DAX stock index "is due for a catch-up rally." Cyclicals--including Linde, Deutsche Babcock, and Thyssen--get his nod. Grubb also believes the French franc will weaken and falling interest rates will fatten consumers' wallets. So he's betting on tiremaker Michelin Corp. and carmaker Peugeot.
These aren't the only European multinationals winning global adherents. Richard R. Foulkes, manager of the $3 billion Vanguard International Growth Fund, is buying Dutch-based Philips Electronics, which is now his fund's second-largest holding behind Heineken. Once a deeply troubled manufacturer, Philips has been on the comeback trail recently, thanks to a concerted effort by management. Nevertheless, the stock is trading at a low p-e of 6.3. Now selling for $40, Philips shares could rise 25% by yearend, Foulkes believes. He is also enthusiastic about French oil giant Elf Aquitaine, which has finally done some difficult cost-cutting.
Further afield, a number of stock-pickers are impressed with Poland, where exports were up 40% in the first quarter from the year-earlier period. Shakerchi admires the stock market there for its high reporting standards and strict regulation, which "make it like a Western market." David Mars, Central and Eastern Europe strategist at Swiss Bank, agrees that "over the next 12 to 24 months, Poland looks to be the market to beat." Mars is playing the Warsaw index, where average p-e ratios, most of them in the 5-10 range, are at half the levels to be found in other low-cost exporting countries such as Spain.
In fact, as the developed world slows, emerging markets are again coming to offer value and growth. Michael J. Howell, strategist at Baring Securities International Ltd. in London, says "emerging markets, at the moment, are a haven for the value investor." Thanks to Mexico's peso crisis, many of these markets are at their cheapest, relative to the developed world, since the Persian Gulf war in 1991. What's more, after last year's U.S. interest-rate hikes and the peso shock sent emerging markets plunging all at once, many have recovered.
In Southeast Asia, for example, the liquidity drain caused by foreigners pulling their money out in 1994 held back stock markets throughout the region, even where corporate earnings kept rising--in Indonesia, Thailand, and the Philippines, for instance. Now, with U.S. interest rates falling and money flowing back in, Asia is the area "I feel most confident about over the next six months," says Vanguard's Foulkes.
CLOSE TIES. Most analysts agree that Hong Kong is in for a growth slowdown--perhaps to 5% from an earlier projected 5.5%--but the market still has some nicely valued regional plays. Foulkes is buying Hutchison Whampoa, the infrastructure conglomerate, as a "major player on the region's general growth and prosperity." Not only does Hutchison have far-flung Asian cargo handling, warehousing, and property development businesses, but its chairman, Li Ka-Shing, also has close ties in Beijing's political circles. At around $5, Hutchison stock is trading at 13 times estimated 1996 earnings per share.
If you'd rather focus on a single fast-growth market, you might want to check out Singapore. Its market drifted aimlessly in the first half. But Merrily Chiam, an analyst at Nomura Research Institute (Singapore), suggests that awesome earnings reports could push stocks up 10% by yearend. She favors Fraser & Neave, an expanding regional food and beverage group with exposure in mature markets such as New Zealand and emerging ones such as India. Chiam also likes Keppel Corp., a conglomerate with ship repair, banking, and telecommunications businesses, among others. Both Keppel and F&N are blue chips that she expects to trade at higher multiples over the next few months.
Chiam is also a fan of neighboring Malaysia, where the official goal of reaching developed-nation status by 2020 should spell higher profits for infrastructure companies. One beneficiary could be IJM Corp., a construction company with an order book of more than $408 million. She also likes United Engineering (Malaysia), with its exposure to toll-road building, engineering, and cement production.
POISED FOR GAINS. Bank and other financial stocks weigh heavily in most Asian indexes, and they remain useful proxies for markets with good prospects. Thai Farmers Bank and Krung Thai Bank get votes from Sriyan Piterz, a strategist at Capital Nomura Securities in Bangkok, as plays on the Thai economy and U.S. rates. Piterz says Thai Farmers has been broadening its noninterest-income base and getting into debt underwriting. Krung Thai, meanwhile, has Thailand's largest retail network and is poised for further gains as the middle class expands.
What of the tequila hangover in Latin America? Six months after the Mexican peso devaluation, Latin American markets are rebounding, but analysts warn that much uncertainty about the region's economies remains. That's particularly true for the region's three biggest markets. Investors will be watching the effect of Argentina's recession on corporate earnings, the pace of Brazilian economic reform, and the potential for social unrest as Mexico enters the worst of its recession.
In Brazil, where a slow start hasn't killed most investors' faith in economic reform, analysts suggest focusing on expected privatizations and companies that will continue to benefit from strong domestic demand. Some stock-pickers are buying Telebras, the national phone company. But others prefer smaller offerings. "If you fundamentally believe in Brazil and know that reform is going well, then it's a good time to build a portfolio of second-tier companies," says Juan Mesa, director of Latin America research for J.P. Morgan Securities Inc. Among utilities, he likes Cemig and Celesc. He also recommends Companha Vale do Rio Doce, a highly regarded natural-resources conglomerate. The government plans to sell off its 51% stake in the company in 1996.
With an average valuation of about 10.5 times estimated 1995 earnings, analysts argue that there's strong value in the Argentine market, even though earnings growth will be weak this year. J.P. Morgan's Mesa believes that investors will begin to look again at company fundamentals rather than merely trading on the country's macroeconomic prospects. He is recommending the two telephone companies--Telecom Argentina and Telefnica de Argentina--along with the Buenos Aires electrical utility Central Costanera. He also likes Perez Companc, an energy company with interests in oil exploration and petrochemicals. Its aggressive management has taken shares in privatized Argentina companies.
WEAK-PESO PLAYS. Despite Mexico's peso collapse and private forecasts of a 4% contraction in gross domestic product this year, some hardy money managers see opportunities in the market. The Bolsa index is still down almost 50% in dollar terms since last fall, and stocks have yet to bounce back to predevaluation levels. Still, they have climbed steadily in the past two months. Analysts cite such blue-chip bargains as Grupo Televisa's American depositary receipts, which are down 45% so far this year.
The peso's drop against the greenback is good news for export-oriented companies with manageable debt burdens. Grupo Alfa, with exports of steel and petrochemicals to a variety of markets, heads many analysts' lists. Other weak-peso plays include mining companies, such as IndPound strias Peoles and Grupo Mexico. Then there's bottler Coca-Cola Femsa, whose 51% share in the Buenos Aires Coke franchise is likely to offset this year's slide in Mexican demand, providing income in strong Argentine pesos.
Some analysts stand staunchly by beat-up Telefonos de Mexico, whose ADRs have skidded 25% so far this year. At about $30, Telmex is now trading near the price it fetched in its 1991 privatization. But since then the phone company has poured more than $8.5 billion into everything from digital switches to rural lines. "Telmex will always keep growing," insists Jose Mondragn, director of Arka Securities in La Jolla, Calif.
The guaranteed-expansion argument is behind investors' return to emerging markets everywhere. After all, the fundamental reason for buying into them is intact: Their long-term growth prospects still far outstrip those for developed countries. But in today's low-inflation environment, stock seekers can find plenty of buying opportunities even in the industrial world.By Joan Warner in New York, with Bill Javetski in Paris, Elisabeth Malkin in Mexico City, and Dave Lindorff in Hong Kong