Emerging Markets Appear to Be Regaining Confidence

Will the recent rebound in emerging markets continue?

Many U.S. investors can be forgiven for being skeptical. Emerging-markets stock funds have been abysmal performers in the 1990s, save for one big year: 1993, when the average fund soared 72.2%.

Since then, one disaster after another has befallen emerging markets, from Mexico (the 1994 peso devaluation) to South Africa (plunging gold prices) to East Asia (the current recession that began in July 1997) to Russia (the economic collapse of last August).

The result: The average emerging-markets stock fund has lost an average of 6.7% a year over the last five years--while the average U.S. stock fund has gained 18% a year in that period.

But since October, many battered emerging markets have been resurging.

In East Asia, Tim Condon, market strategist at Morgan Stanley Dean Witter in Hong Kong, believes that an economic recovery finally is underway, led by a resumption in consumer spending.

People who doubt such a recovery is possible, he says, “fail to appreciate how much purchasing power was locked away during the financial crises because of panic about the future.”

At the same time, the continuing gains in Japanese stocks suggest that investors believe that economy will finally pull out of its funk as well. (Investors have, of course, been fooled several times in the 1990s by Japanese market rebounds that didn’t last.)

Meanwhile, in Latin America, Brazilian and Mexican stocks have rocketed this year as many investors bet that Brazil’s recession in the wake of its currency devaluation will be sharp but short and that Mexico’s economy will continue to benefit from its close ties to the robust U.S. economy.

But for many U.S. investors the question may boil down to this: As long as U.S. blue-chip stocks continue to soar, does anyone need emerging markets?

Some analysts believe that interest in emerging markets will pick up assuming the global economy does the same. But if global growth were to slow, all bets on the riskiest markets would be off again.

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Ready to Turn?

How the average emerging markets stock fund has performed, annually since 1992 and in the first quarter:

1992: 0.3%

1993: 72.2%

1994: -8.8%

1995: -3.8%

1996: 12.7%

1997: -3.9%

1998: -26.5%

1999: 7.7%*

*First quarter

Source: Morningstar Inc.

Waning Interest

Is America investors’ lack of interest in foreign stocks a good “contrary” indicator-- or will that lack of interest limit foreign markets’ gains? Net purchases of foreign stocks by U.S. investors each year, in billions:

(1988 through 1998)

$10.5 billion in 1998

Source: Securities Industry Assn.