NEW YORK -- A worldwide economic slowdown was under way even before Saddam Hussein rolled into Kuwait. Since then, the sharp rise in oil prices has sliced the top off virtually every stock market in the world.
For investors in mutual funds that buy foreign stocks, the slide is a buying opportunity. Looking ahead, the growth potential of Japan, Germany and many other countries appears to be twice that of the United States.
But foreign markets, even those in industrialized Europe, offer far less protection for investors than Americans are used to. The "emerging markets," including Thailand, the Philippines and Brazil, can be crocodile swamps.
The way out of the swamp (insofar as there is a way out) is to buy mutual funds and let them fight the crocodiles for you. If you don't, here are some of the risks you face:
* Market domination. In many countries -- among them, Sweden, Italy and Hong Kong -- a few businesses or families control a large percentage of the market's value. That's not a level playing field for outside investors.
* Volatility. In general, foreign markets rise and fall more swiftly than U.S. markets do, especially when measured in U.S. dollars. Sometimes the gyrations arise purely from supply and demand -- too much money chasing (or fleeing) too few stocks.
Sometimes it's currency. A falling dollar adds to the value of foreign investments; a rising dollar diminishes it. The emerging markets carry substantial political risk, from coups, domestic uprisings and wrenching changes of policy.
* Different accounting standards. Every nation writes its own rules as to how a company reports profits. What hits the bottom line may bear little resemblance to what is called "profits" in the United States. A World Bank study of 21 emerging nations found that only seven had acceptable financial reporting requirements.
Some countries, however, publish financial data of the highest quality. "India and Malaysia are better than France or Germany," says David Gill, a specialist on "emerging markets" for Batterymarch Financial Management in Boston.
* Lower standards of regulation. Insider trading is a way of life abroad. Brokerages and investment groups might gang up on a stock to drive its price up or down, a tactic common in the United States back in the 1920s.
Almost no financial disclosure may be required (Switzerland being especially notorious for the secrecy under which its corporations are allowed to operate), reports the North American Securities Administrators Association, an organization of state securities commissioners.
Still, for all their wild velocity, foreign markets hold the key to investment profits in the 1990s. To hedge against the risks, diversify. A long-term investor belongs in mutual funds that invest worldwide.
The speculator's playground is the single-country funds, whose prices have collapsed this year. Analyst Thomas Herzfeld is recommending funds that sell at 20 percent to 30 percent below the value of the securities in their portfolios.
Brand-new stock markets can perform spectacularly well, says Batterymarch's Mr. Gill. In Turkey, for example, equities leaped by 300 percent last year and are up an additional 59 percent this year.
Historically, Mr. Gill says, there's a "huge zoom up in a market's formative period," then a 30 percent drop as people collect their profits and leave, then a persistently higher rate of growth than you'd get from a market that's more mature.
But the formative years are also the most dangerous. "As the financial life is developing, people start to seek opportunity and abuse comes in," says William Tyson, associate professor for legal studies and accounting at the Wharton School.
A number of international organizations are studying market regulations, with the long-term goal of creating broad standards that every country can agree on. But that raises yet another risk to American investors. Any compromise with, say, the Swiss, on financial disclosure means that they'd disclose more but American companies could disclose less.
I like the profits in the foreign markets but would much rather see them play by our rules.