International -- Cover Story: THE BUSINESS WEEK GLOBAL 1000
THE ACTION IN EMERGING MARKETS (int'l edition)
It's been a rough year for companies in the world's emerging markets: The sudden devaluation of Mexico's peso in December undermined confidence in economies from Latin America to East Asia. For the 26 developing countries tracked by the International Finance Corp. (IFC), the overall market plunged 15% in the first quarter--and was still down 9% by May 31.
But there are plenty of bright spots in the emerging-market tableau. Asian markets have fully recovered, although Latin American markets were still off 21% at the end of May. And despite this year's rocky start, emerging-market equities will still attract net inflows of some $25 billion in capital this year, says Michael Howell, director of global strategy at London-based Baring Securities International Ltd. That figure, which includes Hong Kong and Singapore, is down from 1994's estimated $39.9 billion and 1993's $62.4 billion, but it's more than in any year before that.
BUSINESS WEEK's roster of the top 200 emerging-market companies, compiled by Morgan Stanley Capital International Inc., highlights the performance of leading corporations in the most dynamic, if volatile, economies. Ranked by market value, many of these companies are becoming global players in their own right.
Currency influences how the companies stack up. Euphoria over Mexico, particularly among U.S. investors, had led many to buy dollar-denominated equities, such as American depositary receipts of Mexican phone company Telmex, thinking of them as dollar stocks. But Telmex lost 55% of its market value in the year ended May 31 and fell from No.1 to No.3 on the Scoreboard. By contrast, Asia's stronger currencies are a key to that region's better performance in the rankings.
The Scoreboard sends a cautionary signal about companies in Latin America. Of 30 Mexican companies on the list in 1994, just nine remain. The shrinkage is partly due to the addition of Malaysian and South African companies, which Morgan Stanley has moved to the emerging-market list from the Global 1000 Scoreboard. A few Mexican companies are benefiting from their strong dollar exports: One such, copper miner Grupo Mexico, has seen its market value rise by 97%.
But values are down 50% or more even for well-run companies that depend mainly on the depressed domestic market, such as paper products maker Kimberly-Clark de Mexico and retailer Cifra, which has a joint venture with Wal-Mart Stores Inc. "There will be great opportunities for buying" such stocks, says Alexander Anderson, research director at Mexico City brokerage Abaco Casa de Bolsa, if economic growth picks up by yearend, as most analysts expect.
Argentine companies, hit by shock waves from Mexico's debacle, are still depressed by lingering fears that the Argentine peso's parity with the dollar can't be maintained. But elsewhere in Latin America, the outlook is brighter. In Brazil, economic recovery and free-market reforms, including broad privatization plans, have lifted values of state-controlled companies such as mining giant Vale do Rio Doce and electric holding company Eletrobrs, which moved up to No.4 on the Scoreboard. "There's a good chance [the Brazilians] are getting it right this time," says Joyce E. Cornell, manager of Scudder, Stevens & Clark Inc.'s Luxembourg-based Emerging Markets Growth Fund.
Meanwhile, Asia's ascendancy among the emerging markets is symbolized by Korea Electric Power's rise to the top of the Scoreboard, replacing Telmex. While Korea Electric gained 10% in market capitalization, highfliers such as Samsung Electronics Co. better exemplify the high-tech drive that is powering Korea's economy. With an 80% jump in market value, the company leaped from No.20 to No.7. Even so, Samsung's price multiple of only 5.6 times estimated 1995 earnings, which are expected to double 1994's $1.1 billion, leaves it still "the world's cheapest semiconductor stock," says Rhee Namuh, an analyst with J.P. Morgan Securities Asia Ltd. in Hong Kong.
Weighing down the performance of Korean stocks, though, is a potential oversupply. As of July 1, the limit on foreign ownership in a Korean company is still tight, even though it is scheduled to rise from 15% to 20% by next year. The government plans to flood the market with sell-offs of its holdings in giant Korea Telecom and other companies to raise money for infrastructure projects.
NO FAD. With economic growth now strong throughout Asia, stock-picking based on industry-sector prospects and company fundamentals is becoming more important than faddish trends such as the fading Mexican "tequila effect." In Taiwan, electronic producers are strongest. One example is integrated-circuit maker United Micro Electronics Corp., with an 81% rise in market value. "Because [the IC] market has been so hot over the last two years, their sales and earnings have been enormous," says David Hsu, managing director of brokers Jardine Fleming Taiwan Securities Ltd. in Taipei. Walsin Lihwa Electric Wire & Cable, which owns 50% of an IC maker, is up 76%, and No.1 IC producer ACER has risen 55%, helped by a joint venture with Texas Instruments Inc. to make ICs.
Again this year, Thailand's banks are impressive performers, led by Krung Thai Bank, with a 72% jump in market value. Eric Uchida Henderson, an analyst at Nomura Securities in Bangkok, says efficiency gains from deregulation have particularly benefited Krung Thai. The Thai market pacesetter, though, is oil company PTT Exploration & Production. "It's one of the few exploration plays in the region, and its proven reserves are impressive," Henderson says.
In Malaysia, where gross domestic product is rising 8% to 9% this year, "we're saying, go for the infrastructure sector," says regional strategist Peter Churchouse at Morgan Stanley in Hong Kong. Construction company Renong, with many government contracts, is one good bet. But Telekom Malaysia, No.2, rose only a meager 4% in market capitalization because it's losing its monopoly status. For the same reason, electric utility Tenaga Nasional, No.5, lost 21% of its value.
India's main attraction is the fast rise in corporate profits, growing at a pace "probably higher than anywhere in Asia," Churchouse says. Truckmaker Tata Engineering & Locomotive Co. saw its market value rise 30%, reflecting its best year ever in sales and profits. India's problem, Churchouse adds, is that "the market keeps getting set back by things unrelated to corporate earnings: an insurrection in Kashmir, scandals in settlements, and so on."
Indonesia offers "outstanding value," according to Robert Rountree, an analyst at Nomura Research International in Hong Kong. Shares are underpriced because "the market has totally ignored the 20.4% earnings growth in 1993, 25.6% in 1994, and 25.6% forecast for this year," Rountree says. In the Philippines, too, Rountree thinks the market has been ignoring good news. But that's probably about to change, he says, noting the 120% gain in first-quarter results of real estate company Ayala Land, a subsidiary of Ayala Corp.
HIGH COSTS. In South Africa, political confidence instilled by the April, 1994, national elections also triggered a surge of activity. The Johannesburg stock exchange index rose 24% by the end of 1994, dropped briefly following the Mexican peso debacle, but recovered by May. After a three-year recession, renewed GDP growth, estimated at 3% this year, is fattening profits of industrial conglomerates such as Anglo American Industrial Corp., up 29% in market value, and South African Breweries, up 43%. But investors' traditional favorites, gold mining stocks, are being hurt by high operating costs.
For Scudder's Cornell, Eastern European companies are among the most attractive. The fund's biggest investment there is in Polish tiremaker Debica, which is profiting from Poland's auto industry buildup and from hard-currency exports.
This year, the most spectacular Scoreboard performance was the 959% gain of Turkish petrochemical company Petkim T.A.S. Its performance reflects strong worldwide demand for petrochemicals, Turkey's progress in cutting inflation, and a market runup in May in anticipation of the governing coalition's victory in June elections. In 1994, Petkim didn't even make the list.
Such wild swings, from Turkey to Mexico, are among the rewards and hazards of investing in emerging markets. Over a broad range of companies and markets, Boston-based fund analyst Micropal Inc. calculates that $100 invested on Dec. 31, 1984, in the IFC's Global Index, which reflects the performance of 1,449 emerging-market companies, would have grown to $528.07, including reinvested dividends, by June 22 this year. A similar investment in Morgan Stanley Capital International's World Index of 1,577 companies in developed markets would have grown to $461.91. That difference tells why investors will keep putting money into emerging markets, despite their ups and downs.John Pearson in New York, with bureau reports