OUTLOOK FOR SELECT EMERGING MARKETS
Emerging
markets will shine in 1997. Even though U.S. stocks are overpriced, there
is tremendous value overseas. There's a lot of cash sloshing around the
world - and that cash will flow into developing stock markets.
Rates might spike higher early in 1997, but it will be temporary.
Global liquidity trends will fuel explosive growth in emerging markets.
World-wide money supply, measured by OECD M1, is booming. That will lead
to an acceleration of world-wide economic growth.
Liquidity will be attracted to regions where earnings are beating
expectations. Since inflation will remain tame (unless there is an oil shock),
equity valuations will surprise to the upside. Unless the U.S. bond market
collapses and never recovers, speculative bubbles will appear in selected
emerging markets.
Lagging markets will catch up with world averages, while over-extended
markets will deflate slightly - but the overall trend will be up. Business
Week ran a cover story about the "death of Asia," so the beaten-down
Asian markets are close to bottoming (remember, Business Week declared "The
Death of Equities" in 1982).
Singapore, Indonesia, and Korea
got hammered in 1996 as their highly cyclical economies collapsed. This
story will quickly reverse. I'm keeping an eye on some undervalued Indonesian
stocks. Korea will be one of the region's top performers as domestic rates
decline. Our Korean play is POSCO, the world's largest steel company. And
I'm keeping an eye on some undervalued Singapore banks ...
Thailand will also get a 40% to 50% bounce
from the lows - but I don't believe the bottom is in place yet (although
it's close, since investors are blowing their brains out on the trading
floor). I am planning a research trip to Thailand to investigate some companies.
And we may get a chance to buy an old profitable Taipan pick, the Thai Capital
Fund, below current levels.
Israel will probably tighten credit to
counteract years of easy money policy, rampant inflation, and a growing
current account deficit. At the same time, the Palestinian situation will
escalate. The Israeli stock market will probably perform poorly, but the
Israeli high-tech sector will stand up. Fund managers view Israel high-tech
stocks as cheap alternatives to U.S. tech stocks, so mutual fund cash will
pour into the pure tech plays, like Elron. Turkey has already had
its run. I expect stocks to back up from record highs. But there may be
some buying opportunities in the alcohol sector.
South Africa is in a bind. If it doesn't
tighten credit, the rand will keep crashing. The possibility of higher rates
will continue to hurt stocks. But South Africa remains the backbone of the
entire Sub-Saharan region - an imminent growth story. If the government
keeps dragging its feet with exchange controls, the stock market will correct
before going higher. We'll look for a chance to take profits on our South
Africa pick, the Southern Africa Fund, in early 1997.
Zimbabwe doubled in 1996 to unsustainable
levels as foreign investors poured in. If the market corrects, I'll make
a research trip to the region.
The most exciting region in the world is Latin America - but you'll
have to keep your pants on now. Eventually, Latin America will make the
Asian tigers look like kitty cats. But in the near term, the risks outweigh
potential rewards. Latin American stocks have a tight correlation with U.S.
equities.
That makes even deeply undervalued stocks vulnerable to weakness.
Since there's no fundamental reason for this correlation, eventually the
US and Latin America will go their own separate ways. The biggest gains
will be in Argentina and Brazil - once the bottom is in place.
Buy on a break below current levels. Our Latin American picks are Telmex
and the Brazil Fund (BZF-NYSE).