Mark Madden has been waiting years now for a market like this.
He doesn't own suddenly rediscovered value stocks or an obscure corner of commerce blessed by the Internet bug. Madden, manager of the Pioneer Emerging Markets fund, is invested in Asia, Latin America and developing economies in Europe.
Madden and other managers like him are among some of the best performers of the mutual fund world this year. His emerging markets fund was up 27.7 percent for 1999 as of the other day, and most of its competitors have gained 20 percent or more.
The rally hasn't come a minute too soon. The five previous years, highlighted by Asia's collapse of 1997, Russia's financial meltdown in 1998 and the scare of an economic contagion in Latin America that peaked at the start of 1999 have pulverized emerging market funds.
Madden points to cycles, typically lasting several years, that alternately trounce and boost emerging stock markets. This, he hopes, is the latest turning point in the cycle.
"I think you're going to see a period of pretty good returns," he said. "Retail and institutional money will start to reallocate [into emerging stocks] and that will drive these markets for two or three years to come."
To get an idea how tough emerging markets have been on mutual fund investors, consider the track record of State Street Global Advisors' Emerging Markets fund. It ranks as the single best emerging markets fund over the past five years but returned a mere 16.95 percent during that period, according to Lipper Inc.
Of the 25 emerging market funds with five-year track records, 21 have lost money. During the same period, the U.S. stock market boomed.
"Our net asset value has returned to the levels where it was in 1998," said Tom Haslett, chief investment officer for emerging markets at Putnam Investments. "So, if you went back a little further, you would find we're still massively below the levels where emerging market funds were in the first half of 1997."
The revival of emerging market funds began modestly near the end of 1998, when South Korea and a few other Asian countries began to climb. But the true spark took place in January, when officials in Brazil decided to devalue their currency and days later chose to let the value of the real float. The economic crisis that seemed imminent began to fade and stocks soared.
Beyond the good news for Latin America's largest economy, Brazil's bounce nipped worries that trouble would spread to a new continent.
But further gains in emerging markets around the world are strikingly dependent on many events, some of them beyond the control of developing countries.
For starters, business has to continue to improve. The gap in price-earnings ratios awarded to emerging market stocks and U.S. equities is larger than historical norms, but not wildly out of whack. Emerging market stock profits need to grow.
Of course, the U.S. economy needs to remain stable for emerging markets to do well. "Emerging markets are exporters, they need the developed world to be growing to accept their exports," said Joshua Feuerman, manager of the State Street Global Advisors Emerging Markets fund. "If we saw a dramatic slowdown in the U.S. market, that would negatively affect emerging markets."
Emerging countries also need international investors to take notice of improving conditions and redirect money into those markets.
In small markets with limited liquidity, nothing succeeds like success, though it can also be disastrous in excess.
The value of all the world's emerging market stocks is less than the combined capitalization of General Electric Co. and Microsoft Corp. They don't require huge investment to push prices higher.
Most funds dedicated to emerging markets have liquidated cash positions and become fully invested in stocks over the past six months. However, investors have not been pumping significant new cash into the emerging funds despite their recent performance.
Pioneer's Madden believes that the next source of investment for emerging stocks will come from global funds that usually invest in the United States and more conservative international markets.
Global funds, which combined manage about 13 times the assets of emerging market funds, may have about 1 percent of their money sunk in developing markets at the moment, according to Madden. "Before this is all over, we'll see them at 10 percent," he said.
Pub Date: 5/16/99