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Relax, Hot Foreign Stocks Were Bound to Correct

March 23, 1994|TOM PETRUNO

If the Dow Jones industrial average were to fall 27% in three months, Wall Street would know what to call it: a bear market.

But in many naturally volatile foreign stock markets, a 27% decline--which is what Hong Kong shares have experienced this year--might just be called par for the course.

Yet some American investors, probably new to the international investing game, have been stunned as foreign markets that were red-hot last year have plunged this year. Investors' shock is showing up in a sudden rash of redemptions from international stock mutual funds.

Consider: T. Rowe Price Associates' New Asia Fund, a $2-billion stock fund that invests in Hong Kong, Malaysia, Singapore and other young Asian markets outside Japan, has dropped 20.5% in value this year, as shares in those markets have slumped.

Hopeful investors continued to pump new money into the fund in January and February, even as its share price fell. But early this month, fear began to get the best of some New Asia shareholders. The fund says that since March 1, it has seen 4% of its assets yanked away as shareholders have demanded their money back.

The tide also has turned at giant Fidelity Investments in Boston. The company's emerging markets stock funds, which drew record sums from new investors last year and early this year, now are seeing money flow out, says spokesman Neal Litvack. So far the redemptions are modest, he says--$2 million to $5 million a day on Fidelity's $4-billion base of foreign stock assets.

Nonetheless, Litvack admits, "it's a significant reversal of the trend of the prior eight weeks."


Some foreign-fund owners may have a legitimate reason for getting out, of course, if they bought in well before last year's international stock frenzy and want to realize some of their substantial profits. But if today's sellers include investors who just bought these funds late last year or early this year, they're probably making a classic mistake bailing out.

Why? First, wild price swings are nothing new in emerging markets, because these are markets of relatively few stocks and relatively little trading. Before an investor dumps the New Asia fund because it's down 20.5%, he or she ought to remember that the fund was up 78.8% in value last year. Rarely can you make that much money in a year without giving some back in the next year.

Second, foreign stock markets' great year in 1993 followed five years of generally weak performance. Market cycles tend to run longer than a year, so 1993's surge looked more like a beginning than an ending. Indeed, that's what the economic outlook for most emerging markets suggests, many pros say. "Fundamentally, nothing has changed in most emerging markets," argues Josephine Jimenez, co-manager of the $635-million Montgomery Emerging Markets fund.

Mexico's economy is weak, but that market's biggest problem has been political uncertainty, much of which was dissipated Tuesday when a potential spoiler in the presidential race opted against running. (The news sent beaten-down Mexican shares soaring Tuesday.) Argentina, meanwhile, "is still in the most spectacular recovery that we've seen anywhere in Latin America," says Lawrence Krohn, emerging markets analyst at Lehman Bros. in New York.

On the other side of the Pacific, most local economies are likewise in fine shape, says Dan Duane, whose Prudential Pacific Growth fund invests in Singapore, Malaysia, Hong Kong and other Asian markets. While much of this year's Asian selloff is tied to fears of rising U.S. interest rates--which can automatically push rates up in smaller Asian nations--Duane says the sellers miss the point: U.S. rates are creeping up because the economy is so strong, which should translate into rising export orders for Asian companies.

"World trade should be very strong this year," Duane says, "and that means we should see very good profit growth out of these Asian economies."

With the 16% and 24% market declines in Singapore and Malaysia, respectively, so far this year, Duane says the price-to-earnings ratios on many of those stocks have dropped to the 15 to 20 range, putting them on par with U.S. stocks' P-Es. Yet profit growth in Pacific Rim countries this year should far exceed what many mature U.S. companies are capable of, he says.

Until the last few days, Duane says, his $500-million fund was still taking in new money. Now, he says, the fund is seeing mild net redemptions. While that may temporarily restrict his ability to buy stock, Duane sees a silver lining in worried investors' decision to bail. "Normally," he notes, "people redeem at market bottoms."

Easy Come, Easy Go

Though many foreign stock markets have plunged this year, experts say investors should keep in mind that they are merely taking back some of the tremendous gains scored last year. How some foreign stock mutual funds fared in 1993 and their losses this year:

Total return: Fund 1993 1994 Merrill Lynch Dragon B +85.8% -22.1% World Newport Tiger +75.4 -21.3 T. Rowe Price New Asia +78.8 -20.5 Scudder Pacific Oppor. +60.1 -17.7 Fidelity Emerg. Markets +81.8 -15.3 Montgom. Emerg. Mkts. +58.7 -9.4 Dean Wit./TCW Lat. Am. +46.8 -8.4 Govett Emerg. Markets +79.7 -6.4 Prudential Pacific Gro. B +65.3 -5.5 Scudder Latin America +74.3 -1.6

1994 data through Monday.

Source: Lipper Analytical Services

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