Opportunities Amid The Carnage

This has been a cruel year for investors on many emerging-market bourses. After a stupendous 1993, in which five markets more than doubled, much of the sizzle has suddenly disappeared. With U.S. interest-rate hikes, a global bond-market shakeout, and increasing political tensions rattling even the bravest of investors, many emerging markets have gone into a funk (table).

The carnage has been virtually indiscriminate. Telefonos de Mexico, a bellwether among emerging-markets equities, has skidded 20% since January. So has Thai Fund, which invests in one of Asia's hottest economies. Other issues are down 35% or more. "We're sitting on a pile of cash," says J. Mark Mobius, manager of the Templeton Developing Markets Trust, who has 30% of his $5 billion portfolio in liquid assets. "We refuse to throw it at the market."

VIOLENCE. Yet Mobius is hardly abandoning emerging markets altogether. Indeed, he and other pros say they are still buying--if cautiously. Amid the wreckage of 1994, they insist that there are several hard-hit bourses that merit more than a passing look.

Take Mexico. A rural revolt, kidnappings, and the assassination of ruling-party presidential candidate Luis Donaldo Colosio have helped push the stock market down 11% in 1994. And rising interest rates and foreign exchange losses are eroding corporate earnings. What to do? "Take advantage of this," advises Tamzin Hobday, chief Latin American analyst at Baring Securities Inc. "Buy blue chips."

She and other stock-pickers reason that Mexico's economy will recover from last year's recession as the North American Free Trade Agreement starts to work. And analysts are betting that Colosio's successor, Ernesto Zedillo, will keep the Institutional Revolutionary Party (PRI) in power for six more years. Analyst James M. Bogin of San Francisco's GT Capital Management argues that well-established companies such as Telmex should benefit from improved political stability if the PRI can make good on its pledge for a fraud-free election. But Stefano Natella of CS First Boston prefers Grupo Financiero Banamex-Accival (Banacci), a banking group now on the rebound from a sluggish 1993. And among Hobday's favorites is Soriana, a supermarket

chain whose profits may rise 18% this year.

Brazil may also be overcoming its political turmoil. Investors have been on edge because of a presidential campaign pitting the pro-business former Finance Minister, Fernando Enrique Cardoso, against the front-running fiery socialist candidate, Luiz Inacio Lula da Silva. But the So Paulo market--and Cardoso's hopes--have been buoyed by Brazil's decision to circulate a new currency, the real--a plan Cardoso crafted as Finance Minister. The real will be tied to the dollar. That may cool Brazil's 45%-a-month inflation and give a lift to such consumer issues as cigarette maker Souza Cruz and appliance maker Brasmotor.

Political tensions are abating in South Africa, where investors have begun returning after years of boycotting apartheid. James U. Blanchard III, a New Orleans-based gold mutual-fund operator, thinks the best way to profit from the country's political and economic transformation--as well as any increase in bullion prices--is through such cheap mining issues as Randgold & Exploration and Durban Roodepoort Deep. "You can buy gold in the ground for $20 an ounce," he says, "compared with over $250 in the U.S."

BOOMS. But Templeton's Mobius prefers to invest where he lives, in Hong Kong. Badly bruised earlier this year, the market has recovered 12% since May, and Mobius has been putting some of his cash back into local blue chips. With President Clinton extending Beijing's most-favored-nation trading status, "the bad news is pretty much out," Mobius says. Cgme 1997, when Beijing is due to take over Hong Kong, "this could become the greatest boomtown on earth."

Booms and busts. On many emerging markets, that's the order of the day. If you are a long-term investor with a taste for risk, the strains of 1994 haven't produced disappointments as much as they have created new opportunities.

              1994 percent change*
      CHILE            29.8%
      BRAZIL           25.8
      INDIA            22.5
      SOUTH AFRICA     10.7
      ARGENTINA        5.6
      PHILIPPINES     -4.0
      SINGAPORE       -6.7
      MEXICO          -10.7
      THAILAND        -18.0
      INDONESIA       -19.8
      HONG KONG       -21.1
      CHINA           -56.1
      TURKEY          -63.2
      *In dollars, through June 6     DATA: BLOOMBERG FINANCIAL MARKETS
      Brazilian consumer issues, Mexican blue chips, and South African gold all offer attractive plays
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