(MONEY Magazine) – On a trip to Thailand in January 1997, Mark Madden, manager of the $156 million Pioneer Emerging Markets Fund, visited some two dozen companies asking: How much of the foreign currency debt on your books is hedged against a possible decline in the baht? "At every company, they acted like I had asked a silly question," he recalls. "They said the baht had been stable for 15 years." This lordly confidence made Madden uneasy because he knew Thailand's strong baht was putting the brakes on its export boom and he feared that if consumer spending also fizzled, "things could get ugly. The economy would slow, foreign investors would flee, and that would force the government to devalue the baht." Within six weeks he had pared his holdings in Thailand and other Asian countries from 30% of his fund's assets to 15%. That move helped limit his losses in the summer bloodbath that came when Thailand indeed devalued the baht.

Madden's independent thinking helped propel his fund to a gain of 9.9% last year, while the average diversified emerging markets fund fell 3.9%. In fact, Pioneer Emerging Markets Fund, which Madden launched in June 1994, ranks among the top 6% of its class over the past three years with a 9.7% average annual return. Writer Susan Scherreik caught up with the globetrotting portfolio manager in his Boston office to ask him where he sees the best values over the next 18 months.

Q. How is your fund different from other emerging markets funds?

A. I am not a buy-and-hold stock investor. Emerging markets are small, and it doesn't take much money flowing in from global investors to cause stock prices to double or even triple. Then the markets collapse when foreign money runs for the exits, as we're seeing now in Asia. The boom and bust cycles are very dramatic. So I want to get into a country at the start of the accelerating phase of its economic growth but be out before the contraction phase begins.

I make big bets in countries where I think stocks can rise 45% or more over the next 18 months. When I buy, I set a target price at which I think the shares will be fairly valued. Because emerging markets move so quickly, I can reach the target in a few weeks, although that's rare. And sometimes the price keeps climbing after I sell. My strategy produces twice the portfolio turnover that other emerging markets funds have, but it limits the risk of getting caught if the market turns down quickly.

Q. Are you still selling stocks in Asia?

A. China will be the last shoe to drop, and I just got out of my last holding there--a year ago China accounted for 6.2% of the fund's assets. Among China's biggest problems are its banks, which are saddled with billions of dollars in bad loans. They lent to industrial companies that used the money to speculate in the stock market and to real estate developers hurt by falling property prices. My guess is that a currency devaluation will occur in China over the next 12 months.

The real estate and stock markets have remained buoyant in Hong Kong because China has a large trade surplus, and the wealth created by trading profits has gone into those markets and driven them higher. But China's trade surplus is starting to decline and the Hong Kong markets will suffer. Stocks in both markets could fall 50% from here.

Q. What will lure you back into Asia?

A. I'm waiting for the governments there to cut spending and raise interest rates as called for by the International Monetary Fund. At some point in the next six months I expect Korea, Indonesia and perhaps Malaysia will begin to do so. They've been reluctant because they felt that their economies were much stronger than those in the rest of Asia. That attitude scared foreign investors. If foreign capital hadn't fled these countries, their financial problems would have been less severe. So the first order of business is to restore confidence so foreign capital will come back.

Each country in Asia is at a different stage, however. Because Thailand is further along in implementing IMF austerity measures, its stock market is going to bottom sooner than the rest. So Thailand is hot on my radar screen. Korea and Indonesia may be approaching bottom too. I could see those three markets up 50% to 100% over the next 18 months.

Q. Why do you have 58% of your fund in Latin America?

A. Mexico and Argentina are recovering from very nasty recessions. Stocks in both countries were already cheap and have gotten cheaper because investors are worried that we'll see a repeat of the Asian currency debacle in Latin America. But within six months or so, Latin America will unlink from Asia in terms of investor psychology. The focus will shift to the fact that Latin America is in an economic expansion while Asian economies are still contracting. You'll see Latin American markets go substantially higher.

I have 25% of the fund invested in Brazil because it is the only truly industrialized economy in Latin America. Mexico is nowhere near as industrialized. Brazil is restructuring, with the government undertaking constitutional reform that will eliminate excessive deficits and downsize the overstaffed bureaucracy. Most exciting is the huge privatization program. The government has already privatized the steel industry and is in the process of selling state-run telecommunications companies and electric utilities to investors. Once privatized, these companies can cut employment and modernize plant and equipment to boost efficiency. Unfortunately, an Asia-related sell-off in the Brazilian market has forced the government to raise interest rates, which has caused economic growth to flatten temporarily. But these newly privatized companies don't require economic growth over the short term to realize good returns. They can get them just from increases in efficiency.

Q. Anyplace else look good?

A. I've been adding to the fund's position in Israel, which represents 9.4% of assets. It's unique in the emerging markets universe because you can buy truly globally competitive companies there. Israel benefits from having a lot of Russian emigres who trained at some of the world's top technical schools, and the number of engineers per capita is one of the highest in the world. I like telecommunications, defense and pharmaceutical concerns. They market their products around the world, so they have been somewhat insulated from the slow growth in the Israeli economy over the past two years.

Q. Tell us about some of your favorite stocks.

A. One of my biggest holdings in Brazil is Telebras (TBR; on the New York Stock Exchange in American Depositary Receipts at $107.50 as of Jan. 27; 1.7% yield). It really tanked in the second half of 1997 in response to the Asian crisis, but I think it will rebound later this year as the restructuring efforts take hold.

Elsewhere in Latin America, Mexico's Grupo Televisa (TV; NYSE, ADR, $32.75; no yield) is a great buy. The company has a near monopoly of TV broadcasting in Mexico and sells its programs to other Spanish-speaking countries. It's a tremendous franchise. Televisa would be worth around $45 a share if it were broken up and sold in pieces. But with Mexico's economy still in the early stages of recovery, earnings are depressed and the stock is 24% below that price. The company has practically been giving advertising away just to fill the space, and it has invested heavily in cable and satellite projects that haven't come to fruition yet. As the economy picks up steam, spending on advertising will also recover, allowing Televisa to raise its rates. Operating cash flow--that's earnings before interest, taxes, depreciation and amortization--amounts to just 15% of the company's revenues today but could easily double to 30% within 18 months. For most global media companies, operating cash flow is 40% to 50% of revenues, so there's a lot of room for recovery.

I also like the Israeli pharmaceutical company Teva (TEVIY; Nasdaq, ADR, $45; 0.8% yield). It's a high-quality maker of generic drugs that sell in the U.S. and Europe, but it is also developing patent medicines that have higher profit margins. Copaxone, which treats multiple sclerosis, has the potential to be a blockbuster. It is one of a number of drugs that reduce the frequency of relapses, but early indications are that Copaxone doesn't cause flu-like side effects as the other drugs do. Along with a few other products in the hopper, it could double Teva's earnings over the next two to three years.

Finally, I'm really big on Central European Media (CETV; Nasdaq, $21.75; no yield), a television-programming company with operations in the Czech Republic, East Germany, Poland, Romania and Slovenia. These are the folks who are bringing Baywatch to Eastern Europe. CETV is the only stock I own in Eastern Europe, and 5% of the fund is in it because it's a great growth story. Local programming is so awful that people want to watch syndicated U.S. and Western European TV shows. That means CETV can charge advertisers premium prices.