Ex-Deadbeat Nations Are Becoming World Beaters for Investors

There are great lessons in what’s happening today. The poorer countries of Latin America and Asia are picked by investors and money managers all over the world as some of the most successful economies of the next few years--economies that only a decade ago were given up as deadbeats--while a onetime world beater such as Germany is now effectively “bankrupt,” says a leading German economist.

A major trend is under way, and more than a few hot stocks are involved. Right now, in fact, U.S. mutual fund investors are buying government and private company bonds of Mexico, Argentina and the Philippines--the same less-developed-country debt that learned experts in the 1980s saw as threatening to bring down the world economic system.

The yields on such investments run about 9% to 10% a year, but they are less risky than they used to be because governments throughout the developing world are reforming their economies in order to qualify for global investment.

Meanwhile, Germany, most countries of Europe and Japan will struggle to modernize their economies this decade, and there will be a long pause in their rising prosperity. The United States, having already suffered through recession and restructuring, should fare better than other developed countries, but it too will send investments to the hot markets in developing countries.

What’s involved is a shift of resources from the rich nations--the two dozen or so members of the Organization for Economic Cooperation and Development that have roughly 20% of the world’s population but account for 65% of global output of goods and services--to the many other countries that have 35% of the world’s gross domestic product and 80% of its population.

But the transfer is being accomplished by investment, not foreign aid or charity. The thinking in financial markets, says Robert Citrone, portfolio manager of Fidelity’s Emerging Markets Bond Fund--one of many new mutual funds investing in developing countries--is that the poor nations will grow faster than the rich for years to come. Early in the next century, the now-poorer countries will account for 50% of the world’s output.

That’s the vision behind the flow of mutual fund and pension fund money to “emerging markets”--a much more dynamic and promising term than “less developed country.” Figures are sketchy on just how much is going to the poor countries, but it’s a growing percentage of the $177 billion that U.S. pension funds have invested abroad and the roughly $50 billion that U.S. mutual funds have put into foreign stock and bond markets. Such portfolio investments are in addition to direct business transactions, such as Bell Atlantic’s $1-billion investment this week in the Mexican cellular telephone company Iusacell.

All the investors are seeking faster growth and a higher return than they can get back home where economies are sputtering along.

“We have to think of growth again,” says Nicholas Knight, deputy managing director of Nomura Securities. Knight, who has been visiting portfolio managers in Europe, Asia and the United States, reports they favor investing in Mexico--with or without the North American Free Trade Agreement--Argentina, Chile and even Peru. And in Asia, they favor practically all the non-Japan countries, from Singapore, Taiwan and South Korea to Thailand, Malaysia, Indonesia and the Philippines. Vietnam is sure to be added to the list.

Isn’t that risky? How can money managers take such an optimistic view when politicians and assorted experts in Washington and other capitals are so gloomy? “Because politicians don’t understand dynamic processes,” says Norbert Walter, chief economist of Deutsche Bank, Germany’s largest bank.

His own country has lost its dynamism for the moment, Walter explains. Germany built a mighty economy in the last 50 years on principles of skilled work and high quality. But it also built a social system that financed high fringe benefits with very high taxes--up to 53% on income, 30% for social security deductions and a 15% value-added tax on all goods. The result is that a German skilled worker can pay 70% on part of his income, says Walter. And this has led to slowdown. “We don’t try harder,” says the 49-year-old economist. “Our managers talk more of vacations than of products and clients.” Reform to make Germany dynamic again may take the rest of this decade, he estimates.

Meanwhile, the developing countries are reforming their economies. State industries that employed a lot of people but produced little are being privatized--beginning with telephone systems that are being modernized with investment from major telecommunications firms such as Bell Atlantic.

Government budgets are being balanced and inflation sharply curtailed. Global investment has followed.

Yes, but why did such a change come over previously destitute countries? A combination of factors brought about reform, from the availability of global capital to the desire of poor countries to join the world economy.

And there was one other almost forgotten technical innovation: In 1989, the U.S. Treasury stepped in with collateral to support Mexican government bonds. J.P. Morgan & Co. arranged similar support in private markets. And the schemes worked: Mexican government bonds that sold for 40 cents on the dollar three years ago sell for 80 cents on the dollar today.

The lesson is that realities change constantly and what was certain yesterday may no longer be true today.