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With Asia on Sidelines, Middle East, Europe Stocks Get New Attention

It has been a year since the Asian economic crisis broke, and most nations in that region are still hurting.

Yet developing countries in other parts of the world aren’t faring nearly as bad and may even be learning from Asia’s mistakes.

Managers of mutual funds that focus on emerging economies say they’re still finding plenty of stocks to buy. The difference is that while they previously might have sunk one-half or more of their portfolios into Asian companies, that slack is being taken up by larger investments in once-offbeat areas such as Eastern Europe and the Middle East.

“The emerging European and North African countries are doing well and will continue to do well, helped by growth in Western Europe,” said Joyce Cornell, lead manager of the Scudder Emerging Markets Growth Fund in New York.

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So far this year, five of eight emerging European markets have gained ground in dollar terms, according to the International Finance Corp. in Washington. So have three of six Middle Eastern and African markets tracked by the group, which finances private enterprise in developing nations.

By contrast, nine of 10 Asian markets are showing losses for the year, as are all six Latin American bourses. Stocks in Latin America have suffered from the Asian fallout.

Eswar Menon, who runs the Nicholas Applegate Emerging Countries Fund in San Diego, believes many investors are lumping all emerging markets in the same category with Asia, but he points out that there are key differences.

“The big problem is with Asia’s banking crisis, which is not resolved and is holding back the economies,” he said. “In most other emerging countries, the banking sectors are generally healthy.”

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With the notable exception of Russia, which continues to slog through a painful transition to a market economy, stock prices in other emerging European nations mostly have been on an upswing.

“With possible inclusion in European Monetary Union and the European Union, a lot of these peripheral markets will enjoy a windfall,” said Paul Rogge, portfolio manager of Aim’s new International European Development Fund in Houston.

He points to Portugal as a prime example. The country receives $20 billion a year from wealthier European nations for infrastructure development and agricultural subsidies. Inflation, which was in double-digit figures at the start of the decade, has fallen to around 2%. Portugal’s budget deficit also has been heading south.

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Stocks aren’t cheap, selling at 25 times this year’s earnings, but profits are rising at better than a 20% annual clip, Rogge says. One of his favorites is Banco Comercial Portugues, which recently started to sell mutual funds, mortgages and life insurance to customers. “There’s great growth in providing normal financial products to a population that hasn’t had them before,” he said.

Portugal accounts for nearly half of the Aim fund’s 10% weighting in emerging markets. Another way Rogge plays the emerging theme is by investing in Western European companies that have taken big stakes in their developing neighbors. One example is Hartwall, a Finnish brewery that has acquired Russian breweries and introduced Western accounting practices.

Poland and Hungary have emerged as two of the leading investment destinations in Eastern Europe. Both nations have relatively advanced economies and good trade links to Western Europe.

Maciek Kaminski, who runs the Kaminski Poland Fund in Minneapolis, says that country’s attractions include political stability, high economic growth, an educated work force, labor rates below those of Mexico and a strategic location between Germany and Russia.

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Kaminski, who was born in Poland but emigrated in the late 1960s, adds that inflation and unemployment are falling in his homeland, while the Polish currency has stabilized. “All the numbers are moving in the right direction,” he said.

Cornell, who also runs an emerging-markets portfolio for Kemper Funds, has her largest holdings in Poland, at about 14% of assets, and a sizable stake in Hungary. But she speaks more enthusiastically about Middle Eastern nations.

“The Arab countries are doing all the right things,” said Cornell, referring to market-based reforms, privatization, new banking regulations and modest budget deficits. “They’re taking the lessons [of the Asian crisis] to heart, and they’re flexible.”

Arab stocks also are cheap. Cornell has earmarked 10% of the Scudder portfolio for Egypt, where shares trade at less than 10 times 1998 earnings and yield 8% on average, and have a stable currency behind them. Egypt’s economy is growing by 6% a year, and it has partly recovered from a collapse in the key tourism sector brought about by militant attacks on tourists.

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Also in Egypt’s favor is that its stock market, established by the British more than a century ago, is modernizing and instituting reforms designed to ensure fairness.

Cornell adds Morocco to her favorites list, for many of the same reasons, along with Oman, which has a modern stock market and an economy that’s diversifying away from oil.

Menon cites Israel as his favorite Middle Eastern destination. The country has vibrant technology and banking industries, and inflation is low, he said. Outside of Latin America, the Nicholas Applegate fund’s heaviest weighting is in Israel, at about 9% of assets.

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Managers of diversified emerging-markets funds can’t ignore Latin America--its economies are simply too big for that--although the region has been in an investment slump this year. Many good investment opportunities remain there, however. Menon and Cornell, for example, each have between 30% and 35% of their portfolios in Latin America.

For now, then, the developing nations of Europe and the Mideast are stealing the emerging-markets show. For once, the spotlight’s not on Asia or Latin America.

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Russ Wiles is a mutual fund columnist for The Times. He can be reached by e-mail at russ.wiles@pni.com.

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