Now's not time to buy overseas

On athe Money

Emerging markets expected to fall more before a turnaround

Your Money

March 25, 2007|By Gail MarksJarvis | Gail MarksJarvis,Chicago Tribune

An opportunity to buy emerging-market stocks is likely to surface within a few weeks as nervous investors continue to flee from risky stocks, experts say. But analysts are warning investors not to be too eager to overindulge now.

With emerging markets down about 10 percent, analysts say it would not be surprising for the stocks to tumble another 10 percent or 15 percent.

Long term, they are confident that emerging markets - developing areas of the world in Europe, Africa, Latin America, the Middle East and Asia - will be among the world's most profitable investments.


That belief has powered the stocks to such high levels during the past four years that the stocks are expected to be vulnerable in the weeks ahead, especially if investors remain jittery about taking risks as they await the fallout from subprime-mortgage defaults.

"The stocks have climbed about 300 percent in a few years, and that sharp of a run-up should make anyone pause," said David Darst, chief investment officer for Morgan Stanley's Individual Investor Group.

"It takes time for things to correct themselves."

While he is a firm believer in emerging-market stocks, Darst said he would be reluctant to buy until "people throw in the towel."

Risk aversion

In a recent report to clients, Citigroup Latin America strategist Geoffrey Dennis warned investors of "emerging-market danger" and said either a threat to the U.S. economy or a "knee-jerk rise in risk aversion" could cause them to fall sharply.

Even without a shock, he noted, emerging-market stocks are trading at high levels compared with recent averages. Latin American stocks could fall 10 percent, and stocks from other emerging markets could drop 6 percent, just to go back to their 200-day moving averages.

Still, Dennis noted, once they reach bottom, Latin America, developing Europe, Africa and the Middle East stocks as a group could climb 20 percent by the end of 2007.

Keep it small

Increasingly over the past few years, investment advisers have been urging clients to place a small portion of their portfolios into emerging-market stocks, using either exchange-traded funds or mutual funds.

It is important, however, to keep an eye on those investments so that they do not become excessive, said Sandy Lincoln, chief market strategist for Wayne Hummer Asset Management in Chicago.

Lincoln said he often invests about 10 percent to 12 percent in international markets as a whole, including 2 percent to 4 percent in emerging markets.

`Pare it back'

"If a client is comfortable with 3 percent, and it goes to 5 percent, we pare it back," he said.

As for the people eager to get into emerging markets, Darst said he'd like to see an additional pullback, probably not 30 percent, but maybe another 10 per- cent to 15 percent.

Recently, investors have been fleeing emerging-market stocks and moving into safer global equity funds that invest throughout the world, concentrating on developed areas, including the United States.

During the second week of March, 84 percent of money flowing into stock funds was going into U.S. stock funds, especially Standard & Poor's 500 ETFs, according to Investors yanked money from Japan, China and Latin America.

Although investors adored emerging-market funds until the end of February, they pulled out $8.93 billion during the first week of March and then $245 million the next week, said.

No general squeeze

Investors were avoiding risk, worried that China intended to slow its economic growth, and also afraid that the subprime housing loan problem in the United States will cause banks to cut back on lending.

"There is evidence of tightening standards on consumer loans but not a general credit squeeze," Dennis said. "Either way, this may take time to play out."

Over several more months, the markets worldwide could be "vulnerable to more bad news," he said. Dennis cautioned emerging-market investors to avoid thinking of defaults in risky U.S. home loans as a narrow market issue.

"The subprime mortgage sector [problems] would appear to be very domestic, almost parochial," he said. Yet, he noted, global markets have been pummeled as news about mortgage problems has emerged, indicating the issue "needs to continue to be watched by emerging-market investors."

Although some concern has focused on consumers, and the fear that their mortgage problems could cause them to cut back on spending, Dennis said the larger concern would be banks pulling back on lending.

If both consumers and businesses have a more difficult time borrowing money, they could cut back on spending, affecting company profits and stocks globally.

Growing faster

Still, beyond those immediate threats, optimism about emerging markets is palpable.

Northern Trust senior investment strategist Alain Cubeles said: "Emerging markets are too big to ignore. They contribute nearly half of the world's economic activity and are growing at double the rate of developed-country economies."

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