Too Hot For ComfortStanley Reed
Two years ago, Charoen Pokphand Group, a Thai conglomerate, landed a government contract to install 2 million phone lines in Bangkok. CP, whose main businesses are animal feed and poultry, spun off a new company, TelecomAsia Corp., to handle the deal. The company, 15% owned by Nynex Corp., recently floated a 223 million-share offering to the public. Despite the company's meager operating history, the $500 million issue was 17 times oversubscribed, with foreign investors pulling down half. The shares are already trading on the when-issued market at $4--double their issue price and 83 times projected 1994 per share earnings. "It is grossly overvalued," says Elizabeth X.Q. Tran, managing director of Prudential Asia Fund Management Ltd. in Hong Kong.
The TelecomAsia story is far from unique in the developing world: Securities markets are roaring skyward. In Malaysia, a marginally profitable timber and insurance outfit called Idris Hydraulic trades at a huge 272 times earnings. Brokers whisper that the company's political connections will pay off in a big timber concession in Burma or perhaps a megawater project in Malaysia.
Even mainstream companies are looking very pricey. For instance, most analysts agree that with Singapore wired to the hilt, recently privatized Singapore Telecom's growth prospects are modest. Yet the company sells at 60 times 1993 earnings and recently had no trouble raising $3 billion with a stock offering.
None of this is to say that there aren't compelling reasons to invest in the emerging markets--at the right price. Many of these countries' economies are growing at a 5%-to-10% per year clip, compared with 3% in the U.S. Of late, their markets have far outperformed Western exchanges. Manufacturing is shifting from the West to the developing world, particularly Asia. And companies in these countries are finding opportunities in meeting booming local demand for housing and consumer goods.
FIREWORKS. Still, there are many signs that markets in the developing world are overheating. From Kuala Lumpur to S o Paulo, the emerging markets have had an incredible run this year. Some of the biggest gains have been in Southeast Asia. The Thai stock market has shot up 73%, Malaysia 62%, and the Philippines 88%. In Jakarta, brokers hire people to stand in line for applications to buy new issues, which can almost always be resold at higher prices than the government allows on offerings. Recently, a group of such people, frustrated at waiting all night, rioted and burned tents set up by underwriters to process orders.
Fireworks extend well beyond Asia. Brazil's market is up 79% and Turkey's 189%--despite a nasty Kurdish insurgency. Price-earnings ratios have advanced sharply along with the markets: Mexico City's average p-e has jumped from 12 to 16 in only four months. Manila's has spiraled from 18 to 28. With stock prices thus outstripping profit growth, some analysts think a correction may be inevitable. "It's been a pretty breathtaking performance," says William G. McBride, an emerging-markets analyst at Lipper Analytical Services Corp. "There will be a reckoning."
Investing in emerging markets these days has some of the characteristics of a fad. Once the province of a few intrepid investors, developing countries from Kuala Lumpur to Bangkok have become almost overnight the darlings of mainstream Western banks, pension funds, and other money-management outfits. Michael J. Howell of Baring Securities Ltd. in London reckons that investors in the big industrialized nations will pump some $38 billion into the developing countries' exchanges in 1993.
Individuals have also become big players through specialized funds. Since the end of 1990, 31 mutual funds, 12 closed-end equity funds, and 8 closed-end fixed-income funds targeting emerging markets have been set up in the U.S. alone. These funds, along with existing closed-end funds, have raised $7 billion.
GOOD VALUES. At the end of last year, 13 out of 30 closed-end emerging-markets funds listed on the New York Stock Exchange traded at a premium over the value of their underlying securities portfolios. Now 20 out of 33 do, with the average premium about 11%. Some of these funds seem quite vulnerable to declines.
Some observers argue that, as in any fad, many investors who rushed headlong into these markets could quickly dump their shares if the going gets rough. Miami-based closed-end fund specialist Thomas J. Herzfeld is already preparing for that. While he was fully invested at the start of 1993, the country-fund trading accounts he manages are now 90% in cash.
Big institutions can be especially fickle. They are responsible for much of the boom in the Southeast Asian markets. Already, hot markets such as Hong Kong and Singapore have eased back as institutions began taking yearend profits. Asian markets are unusually susceptible to shifting sentiments because of their small size.
Talking from his car phone in Indonesia, J. Mark Mobius, the hands-on head of the Templeton emerging-markets fund and other Templeton funds, says that while stocks in Thailand and Malaysia and perhaps the Philippines were overpriced, there are still good values to be found in countries such as Brazil, Portugal, and Indonesia. But he admits to seeing more and more signs of excess. Some underwriters, he complains, now have the gall to press him to buy stock without visiting the companies. Mobius won't buy anything without checking it out thoroughly. Others these days seem much less careful.