Emerging Markets: What Recession?

Russia and South Korea, especially, are making waves

Don't tell investors in Seoul, Moscow, or Jakarta that we're in a global bear market: They're too busy making money to listen. While the big-cap bourses of North America and Europe continue to get buffeted by bad news, emerging markets have been on a tear since October. True, some of the exchanges--especially Taipei's--have had recent pullbacks. But they're in prime health compared with the markets of the developed world.

Nowhere is this truer than in Asia, where the high-tech factories of Taiwan and South Korea and the blue chips of Thailand and Indonesia are leading the charge. "It's been a knockout year so far," says Markus Rosgen, Asia regional strategist at ING Financial Markets LLC. No surprise, then, that Asian companies snatched the top three spots on BusinessWeek's list of the largest emerging market companies by market capitalization, as compiled by Geneva-based Morgan Stanley International Inc. At No. 1 for the third year in a row was China Mobile (Hong Kong) Ltd., followed by Samsung Electronics Co. of South Korea and Taiwan Semiconductor Manufacturing Corp.

What investors have figured out is that these so-called emerging markets often have companies as powerful and predictable as anything the West or Japan has to offer. Consider Samsung Electronics. The world's largest producer of dynamic random-access memories (DRAMs), the company continued to invest heavily in research and development during the slump of 2001. Meanwhile, it recently became the No. 3 handset maker in the world, while its slick flat-screen TVs and portable DVD players are hot exports. "A virtuous circle has begun to work for us," says Samsung Vice-President Chu Woo Sik. Samsung expects profits to double in 2002, from last year's $2.47 billion, while market capitalization has mushroomed 58% in the last twelve months.

It's not just tech that has shown new life. In Korea, Kookmin Bank jumped from No. 74 last year to the No. 12 spot. Iconoclastic President Kim Jung Tae has played hardball with deadbeat creditors, tied pay to performance, and invested heavily in modernizing bank info-tech systems. "Kookmin Bank will look increasingly like a leading bank in the West," says Kim. Profits are expected to grow 20% in 2002.

Indonesia, Thailand, and Malaysia added 10 new companies to this year's list, including Thailand's Siam Cement (No. 108) and Bangkok Bank (No. 127), as well as Bank Negara Indonesia (No. 110) and PT Unilever Indonesia (No. 166). All are plays on the resurgence of consumer spending in those countries.

Russia, meanwhile, is in the fourth year of recovery from its own currency crisis. The Russian Trading System Index is up 30% this year. No. 4-ranked oil producer Gazprom jumped from No. 7 in 2001, as its stock rose 81% since last May. That was when CEO Rem Vyahkirev was ousted, bringing an end to cannibalization of the company's assets--allegedly by his cronies.

Will the hot emerging markets cool down? Even as they hunt for bargains, investors are already starting to fret about Latin America, where Argentina's collapse and Brazil's political turmoil have cast a pall over the region. But there's still an appetite for plays in Mexico, where fixed-line telephone operator Teléfonos de México (Telmex), ranked No. 8 in this year's top 200 and the most widely traded Latin American stock, remains the market darling thanks to its strong balance sheet and steady cash flow. "The difficult situation that European and U.S. companies face is because of the megapurchases they made," says Telmex Chairman Carlos Slim. "We've made some mistakes, too, but we've tried to make smaller ones." That's what the best of these emerging-market stocks are: world-class players available at local prices. The bargain hunters are ecstatic.

By Frederik Balfour in Hong Kong, with Moon Ihlwan in Seoul, Geri Smith in Mexico City, and bureau reports

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