Investors Rush In Where They Once Feared to Tread

By TOM PETRUNO

April 1, 1999 12 AM PT

Welcome back, risk takers everywhere!

Well, almost everywhere.

Despite a blue-chip sell-off on Wall Street on Wednesday, the message from markets worldwide in the first quarter was a bullish one: “It’s OK to take chances again.”

If that continues into the second quarter, it bodes well for many stocks, but not so well for government bonds and other such “safe” securities.

Building on the rebound that began in many global markets in October and November, stocks zoomed in the first quarter in places such as Mexico, Russia and India--markets high up on the risk scale. Meanwhile, in Japan, optimism that that nation’s long recession finally is ending sent smaller shares up a stunning 45% as measured by the Nasdaq stock index.

On Wall Street, junk corporate bonds yielding 9% or more were in demand again as investors chased hefty returns and readily accepted the risk that inevitably accompanies those returns.

So much for the deflation/depression worries that caused markets worldwide to seize up late last summer. In fact, the bigger concern for some investors in the second quarter could be that economies outside the United States will begin to show more signs of a sustained rebound--which could have major implications for interest rates, commodity prices and inflation.

In the U.S. alone, “an unceasingly robust pace of consumer spending suggests the Federal Reserve’s next move is to hike interest rates,” warns John Lonski, economist at Moody’s Investors Service. The big question on that, however, is the timing. Indeed, the Fed met Tuesday and opted to leave short-term interest rates alone, a posture the central bank could well keep until summer, economists say.

Still, the Treasury bond market in the first quarter was clearly living in fear of a Fed rate increase down the road. The yield on the bellwether 30-year T-bond ended the quarter at 5.62%, up from 5.09% on Dec. 31.

But concern about the Fed’s intentions wasn’t the only reason Treasury yields rose. That market faced a relative dearth of buyers (thus driving yields up) because many investors found better things to do with their money. Here’s a look at some of the market trends worldwide in the quarter:

* U.S. stocks: The sparkling American economy was all many investors needed to justify sending prices of premier U.S. stocks higher--culminating in the Dow Jones industrial average’s first close above 10,000, on Monday.

By Wednesday, profit-takers were pulling some money off the table, and the Dow was back down to 9,786.16. But it still managed a 6.6% price gain in the quarter, on top of last year’s 16.1% rise.

The broader Standard & Poor’s 500 advanced 4.7% in the quarter, while the technology-dominated Nasdaq composite leaped 12.3%.

But the U.S. market was a decidedly mixed bag. While investors snapped up high-risk stocks overseas, small and mid-sized U.S. stocks had few takers. For the quarter, the S&P; index of 600 small stocks dropped a dismal 9.2% after losing 2.1% in 1998.

Likewise, investors had no appetite for utility shares or real estate investment trusts. On one hand, high-dividend stocks such as those may have been boring fare for investors watching Internet stocks continue to rocket. But utilities and real estate investment trusts also are sensitive to higher interest rates, so the jump in Treasury yields didn’t help.

* Foreign stock markets: Emerging markets were the standouts in the quarter, despite Brazil’s currency devaluation in early January--an event that was expected to further erode confidence in other beleaguered emerging markets.

Instead, Brazil’s stock market quickly rebounded from the devaluation (at least as measured in the native currency), and buyers returned to forlorn markets from Mexico to Russia to Pakistan.

Why? Nearly two years after the Asian economic crisis began, “healing in the global economy appears to be slowly getting underway,” Robert J. Pelosky Jr., emerging-markets analyst at Morgan Stanley Dean Witter, wrote to clients in a recent report.

He’s betting that volatility in many emerging markets will decline and that strength in the global economy will bring more investors back to higher-risk markets.

So far this year, the Fidelity Emerging Markets stock fund is up 8.9%, beating the Dow’s gain.

Still, the benefits aren’t yet accruing everywhere. Malaysia’s stock market slid 14.2% in the quarter. Chinese stocks also remain weak.

Meanwhile, Europe’s stock markets were higher overall in the quarter, but there were notable losers, including Germany (off 2.4%). Analysts say optimism over the euro currency’s debut was overblown. And now worries about the Kosovo situation are weighing on some European markets.

* U.S. and foreign bonds: The smart trade in the quarter was to sell U.S. government bonds and buy junk bonds.

The Invesco High Yield fund’s total return (interest plus share price appreciation) is about 5.4% so far this year, while the company’s U.S. government bond fund has lost about 2.4%.

Demand for high-yield corporate bonds--another bet on a strong economy--helped push the yield on the KDP junk bond index down to 9.46% by Wednesday, versus 9.56% on Dec. 31 and 10.72% at its peak last fall.

Likewise, buyers were hungry for many high-yielding Latin American government bonds that were shunned last fall.

* Commodities: The same optimism about the global economy that’s helping many stock markets is helping depressed commodities as well. The CRB/Bridge index of 17 major commodities has inched up 0.3% so far this year after sliding 15% last year.

Oil is leading the pack, as OPEC has vowed to cut production further. Still, gold prices remain in the doldrums, which suggests skepticism that commodity price gains overall will stick.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

More Market Coverage

* Stock prices retreated as interest rates rose on reports of the economy’s continuing strength. C4

* The Ziff-Davis spinoff of ZDNet exemplifies Internet fever. Market Savvy, C4

* The Times’ quarterly financial report, including a review of market trends, top-rated mutual funds, investment strategies and comprehensive listings, will appear as a separate section Tuesday.

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Return of the Risk Takers

Investors worldwide in the first quarter became aggressive buyers of higher-risk stocks and bonds that had been hammered in last summer’s market plunge. The gains in many markets--along with rising U.S. Treasury bond yields--suggested that fears of global recession or depression have waned. But in the U.S. stock market, the risk takers wanted blue-chip issues and Internet shares--and not a lot else.

Many Emerging Markets Rebound . . .

First quarter gains in key stock indexes (in local currencies)

Russia: +80.3%

Brazil: +57.7%

Mexico: +24.5%

Greece: +23.3%

India: +22.4%

Israel: +15.7%

Chile: +15.0%

South Korea: +10.0%

Peru: +10.0%

Singapore: +9.0%