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Money Report

Emerging Markets Reemerge

Morgan Stanley's (MS) Emerging Markets Index is down only 0.8% year to date vs. the Standard & Poor's 500-stock index's 12.2% decline, and investors are hopping aboard. From Mar. 18-25, emerging-market mutual funds amassed $2.3 billion in new investments--the biggest one-week haul since mid-December, according to EPFR Global. With funds in Morningstar's (MORN) emerging-market category up an average 11.2% over the past month, should you jump in? Morningstar analyst Bill Rocco notes that "one reason they've done better this year is because they did worse earlier in the global meltdown"--not the best argument for sustainable gains. Peru and China lead the pack, gaining more than 25% this year. Betting on country or regional plays is particularly risky in today's unsettled markets, however, so Rocco recommends well-diversified funds like American Funds New World A (NEWFX), and that investors have a 10- to 15-year time horizon.

Disney Down, Time Warner Up?

Does Walt Disney (DIS) deserve to trade at a big premium to its peers? On Mar. 23, Goldman Sachs (GS) analyst Mark Wienkes downgraded Disney to "neutral" and said its valuation premium should be 10% to 15% vs. its current 25% or so. Wienkes, who expects "mediocre" box office results for Disney in fiscal 2009, took his six-month price target to 20, from 26 (Disney closed at 18.16 on Mar. 31). But the fortunes of one of its peers, Time Warner (TWX), may be looking up. Paul Greene, a media analyst at T. Rowe Price--a major Disney shareholder--says Time Warner "has the most resilient media business in this economy." Two-thirds of its cable network revenues come from subscription fees, he notes, and cable stations aren't as dependent on ad revenues as their broadcast brethren. With Time Warner's cable operator spun off, AOL could be next.

Downgrade Risk

For the week ending Mar. 27, $12 billion in municipal bonds were issued, the most since December 2006. The big borrower was California, which sold $6.5 billion in general obligation (GO) bonds, despite a recent credit downgrade. Investors like the yield--4.9% tax-free on a 10-year bond--and the fact that GOs, backed by tax revenue, are seen as a safe haven. If California were downgraded again, this time from A to BBB, the bonds would still face little risk of default and an investor could count on getting principal back at maturity. But default isn't the only worry. If the bond holder had to sell early, that downgrade could mean getting only 85 cents on the dollar. Other states are threatened as well: Illinois saw its rating cut this year, and Rhode Island and Florida are on "ratings watch." "It's one thing to say we don't expect defaults," says Warren Pierson, co-manager of the Baird Intermediate Municipal Bond Fund (BMBIX). "It's still early to say we don't expect more downgrades."

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