The Emerging Market Play Is Alive And Well

For a lesson in the volatility of emerging markets, this year provided a textbook example. After the spectacular runup in stock markets from Brazil to Taiwan last year, the bubble seemed to burst. In Turkey, the roller coaster lifted the price index of Turkish stocks by 500%--then lopped off 25% of those gains this year. In Mexico's bigger market, investors experienced a euphoric 63% rise through January and a 22% decline since then.

Despite the turbulence, shares of most companies from Mexico City to Manila are still riding high, compared with their levels a year ago. For the second year, Morgan Stanley Capital International, based in Geneva, has assembled a list of the top emerging-market companies and ranked them by their market value. Telefonos de Mexico, the phone giant, tops the list for the second year, weighing in with a $32.9 billion market value. That's up 28% in the year to May 31. No.2 honors go to Korea Electric Power Corp., with a $20.8 billion market capitalization. And Taiwan's Cathay Life Insurance Co. is the third-largest entry.

THIN MARKETS. Now, after the recent shakeout, further gains are likely. Investors from the U.S., Europe, and Japan are expected to put more than $30 billion into the stock markets of capital-hungry developing countries from Latin America to Eastern Europe and even Africa this year, says Michael Howell, chief global strategist of London-based Baring Securities Ltd. That's down from last year's phenomenal $40 billion splurge. But in the sell-off by foreigners, which drove prices down in these relatively thin markets early this year, "the net disinvestment wasn't that big," Howell says. Clearly, the emerging-market play is alive and well.

Added together, the market capitalization of listed stocks in the 25 countries tracked by the International Finance Corp. (IFC), the private-sector arm of the World Bank, reached $875 billion in May, up from $485 billion at the beginning of 1993. Privatizations and new issues seem certain to keep pushing the total to new highs. There is a "fairly large backlog of deals to be done" in Asia, says Peter Clarke, Hong Kong-based chairman of Merrill Lynch Asia/Pacific.

What keeps attracting investors from the industrialized world is the prospect of continued fast economic growth in most emerging markets, leading to higher returns. But a key difference this year is that investors are picking emerging-market stocks more carefully. Last year, says Bill Ebsworth, chief investment officer of Fidelity Investments in Hong Kong, simply being in emerging markets was what mattered. "Now there's less liquidity chasing more stocks, and it's far more important to discriminate," says Ebsworth.

LATIN LOVERS. In Taiwan and South Korea, however, foreign investors still face limits on their holdings. Foreign holdings in any single company in Taiwan are limited to 10% of total shares. So many foreigners will remain outside looking in at a promising market. In South Korea, foreign equity investment rose to $7 billion in 1993, vs. $3 billion the previous year, but is also capped at 10% of total listed common shares. Meantime, demand for some blue-chip stocks is so high that they are sold at premiums over the counter. Favorites include Samsung Electronics Co. and steadily growing Hyundai Motor Co.

Latin America, too, is enjoying economic growth and drawing in capital, despite political doubts about key countries. "Compared with Asia, Latin America is not as dynamic, but it has a somewhat better developed infrastructure, and it has a good friend to the north," says Chase Manhattan Bank President Arthur F. Ryan. "That changes your risk perception and willingness to commit resources." Mexico has political jitters as its August election approaches, but afterwards, investors are expected to return to cash in on renewed growth prospects. Alvaro Shiraishi, an analyst at brokers Bursamex Casa de Bolsa, picks construction giants ICA and Tribasa as big players in Mexico's infrastructure program.

Brazil also faces electoral uncertainty, with leftist Lus Incio Lula da Silva currently the front-runner. If he wins next fall's election, the stock market will fall, and "that could be the time to buy," says Paulo Vasconcellos, a vice-president at Merrill Lynch's So Paulo unit. Vasconcellos says consumer-goods companies should benefit if Brazil's new currency, the real, curbs inflation as expected. Other big attractions are telecommunications holding company Telebrs and Telecom de So Paulo. Although both are state-run, sizable blocks of shares are publicly traded. The intense scramble for corporate shares in emerging markets seems to promise that investment money will keep flowing.

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