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Funds cautious but upbeat
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March 10, 1999: 6:38 p.m. ET
Closed-end managers see potential amid devaluations, commodity plunge
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NEW YORK (CNNfn) - Despite a dangerous plunge in commodity prices, recession in Brazil and a likely devaluation in China, the outlook for emerging markets is cautiously optimistic, according to a group of country fund experts.
Financial pros at a Salomon Smith Barney closed-end country fund conference said Wednesday they see signs of recovery in some Asian markets, as well as selected investment opportunities and vast growth potential in emerging markets.
"Investing at the bottom is when you make money," said Paul Rogers, co-lead portfolio manager of the Brazil Fund (BZF).
Managers from about 30 closed-end funds gathered for a two-day forum on their outlook for global investments in 1999.
A closed-end fund has a fixed number of shares and trades like a stock on Wall Street at a premium or a discount of its net asset value (NAV). The funds focus on one country or region.
"If you buy selective, high-quality equities in emerging markets, you'll make money over two years," David Hale, chief global economist at the Zurich Group, said in his keynote address to the conference.
"There are very important structural changes occurring that will set the stage for important improvements in the world economy. There's a great deal of optimism in the air and a great deal of opportunities."
Potential landmines
Despite their glass-half-full approach, the world economy has some significant problems to overcome in the coming months, the experts said.
Abigail McKenna, who heads the Morgan Stanley Emerging Markets Debt Fund (MSD), said continued weakness in commodities prices could be dangerous.
"Further weakness could really test the will of emerging markets," McKenna said.
Likewise, a devaluation in China would trigger another negative wave in Asia, said James Squire, portfolio manager of the Asia Pacific Fund (APB). He said he expects China to devalue its currency, the yuan, in 2000.
And while Hong Kong and Singapore have been open to financial reforms, Thailand, Indonesia and China have not, Squire said.
Robert Meyer, a manager at Latin American Discovery Fund (LDF), said Brazil is facing a serious recession and its gross domestic product in 1999 is expected to fall 5 percent.
"Even though economic growth is going to slow down, the market outlook for Latin America is still positive," Meyer said. "The key is going to be what happens in Brazil."
Likewise, overall bearishness among investors could affect the outlook in Latin America, Meyer said.
"Investor sentiment has been a problem for Latin America and emerging market asset classes as a whole," Meyer said. "This is a time to get in to our portfolio."
Another potential roadblock for 1999 is the impact of Y2K problems in international markets, Zurich's Hale said. While the United States is pretty well-prepared for possible technical problems related to the Year 2000 computer issue, most global markets are not.
That could prompt portfolio managers to pull money out of some international equities later this year -- which could lead to more turmoil, Hale said.
"Y2K could lead to real problems," Hale said.
Strategies for tough times
McKenna, of the Morgan Stanley Emerging Markets Debt Fund, said the fund likely will move more into Asian markets. The fund now has 84 percent of its assets in Latin America, with 28.4 percent in Argentina, 21.8 percent in Brazil and 20.5 percent in Mexico.
"Overall, we're optimistic we'll see some decent returns this year," she said.
In the Brazil Fund, Rogers said he's moving from small cap stocks into large caps. He's also focusing more on telecommunications, banking and consumer goods and moving away from commodities-type companies.
"Brazil is no stranger to economic calamity," Rogers said. "This is a blip."
Squire, of the Asia Pacific Fund, said the region going forward must focus on new sectors, such as telecommunications, electrical components, merchandising, business services and consumer-related companies.
The conference, in its ninth year, is organized by Michael Porter, a managing director at Salomon Smith Barney and a country fund strategist.
-- by staff writer Martine Costello
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