Many of the world's emerging stock markets are bouncing back, after losing 20% or more of their value in recent months. Some Wall Streeters think it's time to buy.
Markets from Chile to Thailand to Turkey were red-hot last year as Americans were reawakened to the potential in foreign stocks, especially those of developing nations. Hong Kong shares, for example, rose 116% last year on average, Taiwan shares 80% and Mexican shares 48%.
But the avalanche of cash into those still-illiquid markets produced wild overvaluations in many stocks by year's end. Ripe for selling, emerging markets needed only a small push to fall off the cliff--and they got that when the Federal Reserve Board began raising interest rates on Feb. 4, causing a ripple effect worldwide.
This week, however, the Fed's fourth rate hike of the year was the catalyst for a rally in many markets, rather than another decline. The reason: The Fed indicated that it's done tightening credit for now, removing the specter of a new surge in rates that could jeopardize global growth.
"What we've seen is a 'sigh of relief' rally" in emerging markets, says Jay Pelosky, Latin America stock strategist at Morgan Stanley & Co.
While the Dow Jones industrial average has risen 2.7% so far this week, Mexico's Bolsa stock index has leaped 7.4%. Hong Kong's Hang Seng index is up 5.3% over the past seven days. And Argentine stocks have advanced for six straight sessions, rising 2.8% on Thursday alone.
Some markets have been helped by more than the Fed. In Brazil, the Sao Paulo stock exchange index zoomed 12.1% on Thursday after the country's congress OKd the second phase of the government's economic reform plan, which is designed to end Brazil's crippling hyperinflation.
And in Mexico, the poor showing of the ruling party's chief rival in a presidential debate last week gave investors more reason to feel optimistic about the outcome of the August election.
Indeed, in most emerging markets the problems dogging stocks this year have been largely political or technical, many Wall Streeters say. (Technical in the sense that heavy profit taking in illiquid stocks can depress prices more than is justified.)
The fundamentals of developing nations' economies, meanwhile, have generally remained healthy--a function of the U.S. economy's strong expansion and the nascent recovery in Europe.
If investors begin to focus once again on growth rather than interest rates, cash should continue to move back into emerging-market stocks, argues Dan Duane, head of Prudential's Pacific Growth fund. "The whole story from now on will be where the earnings momentum is," he says.
One of Duane's favorite markets today is South Korea, which he figures will show real economic growth of 6% this year and corporate profit growth of 20% or better. The risk of war with the North notwithstanding, South Korea is fast supplanting Japan as a supplier of electronics and other manufactured goods to Europe, Duane says.
Scott Kalb, Latin stock specialist at Smith Barney Shearson, this week urged clients to jump back into Argentine stocks. With the threat of more Fed rate hikes removed at least for now, Kalb expects global investors to be drawn to Argentina's expected growth rate of 4.5% to 5% this year, low inflation and political stability.
But are emerging-market stocks cheap relative to earnings? The bulls say yes, but that depends on your idea of "cheap." In any case, it's at least true that the declines in many markets since January have produced more reasonable stock prices worldwide. You're more likely to be paying 15 to 20 times '94 earnings today than 20 to 25 times.
Even so, playing one-country stock funds, or funds of specific regions, is probably best left to traders or to investors with high risk tolerance, because of the volatility in such narrowly focused investments. Most investors would probably be best off in a widely diversified global fund.
David Herro, manager of the Oakmark International stock fund, argues that the bigger risk today isn't overpaying for foreign stocks, but underestimating their long-term potential. "I think this is one of the great buying opportunities," he insists. As he travels the world, Herro says, he sees capitalism blooming all over. "People everywhere just want to go out and do something," he says.
Third World Rebound
Shares of many Latin American and Asian companies, and funds that invest in those stocks, have been climbing sharply from lows reached earlier this spring.
1994 Thurs. close Stock high-low and change Argentina Fund 19 5/8-12 5/8 15 5/8, + 3/8 Banca de Galicia (Arg.) 45 5/8-24 7/8 38 1/2, +1 1/8 Brazil Fund 31 3/4-18 3/4 23, +2 Comp. de Telef. Chile 133 3/4-84 1/4 92 1/4, +1 Empresas ICA (Mexico) 34 1/2-19 1/2 24 7/8, + 1/8 Grupo Simec (Mexico) 33 3/4-18 1/2 22 1/2, +1 1/4 Hong Kong Telecom 65-48 58 5/8, - 5/8 Korea Fund 26 7/8-18 7/8 23, + 1/2 Mexico Fund 40 1/4-24 3/8 30 3/4, + 3/8 Singapore Fund 23 7/8-14 5/8 17 7/8, + 1/2 Telefonica de Argentina 82 1/2-54 1/4 74 7/8, +1 5/8 Telmex (Mexico) 76 1/8-50 59 3/8, +1 YPF (Argentina) 29 5/8-22 1/8 26 7/8, + 5/8
All stocks trade on NYSE except Banca de Galicia (Nasdaq)