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THE RUSSIANS ARE HERE, THE RUSSIANS ARE HERE (int'l edition)

Moscow's stellar showing helps emerging markets rebound from the 1995 crash

A few years ago, only a small group of daring investors was willing to pour money into Russian stocks. Now, Russia is on the radar screen of virtually every emerging-market investor. As the Moscow market soared 124% and companies began issuing American depositary receipts in 1996, Russia rocketed into BUSINESS WEEK's annual list of the top 200 emerging-market companies for the first time. With a market value of $42.6 billion, Russia's Gazprom is just a hair behind No.1 Telebras, Brazil's huge phone company. Six other Russian companies made the list.

Russia's stellar showing is due to a market boom driven by foreign funds. The reelection of President Boris N. Yeltsin in July, 1996, reduced political risk and bolstered foreign investors' confidence in the security of property rights. Indeed, foreigners pumped close to $3 billion into the Russian market in 1996 and have invested $1 billion more so far this year. But the appearance of Russia Inc. on BUSINESS WEEK's list, which is compiled by Morgan Stanley Capital International, also reflects the sheer size of Russian companies. Gazprom controls one-third of the world's gas reserves and pulls in $20 billion a year in revenues. Lukoil, ranked No.20, outproduces Brazil's Petrobras, No.4 on the list. Says Peter Kizenko, senior equity trader at ING Barings' Moscow office: ''We're not talking about breadmakers here. These are mammoth industrial enterprises.''

A VOLATILE WORLD. Across the board, 1996 was a good, but not stunning, year for emerging markets. They continued their rebound after the crash in 1995 following Mexico's peso crisis. The International Finance Corp.'s emerging-market index rose 15% in 1996--somewhat disappointing compared with the 23% rise of the Standard & Poor's 500-stock index in the U.S. While Brazil's Sao Paulo index jumped 53% in dollar terms last year, shares of many leading Indian and Thai companies dropped, mostly because of political instability. In South Africa, the rand's plunge against the dollar as well as depressed consumer spending hurt companies such as South African Breweries Ltd., while Anglo American Corp.'s 9% decline in market value was linked to a slump in gold prices and escalating costs.

Even so, the market capitalization of emerging-economy bourses is nearly $2.5 trillion, according to estimates by Merrill Lynch & Co. That's within a whisker of Japan's total market cap, and the figure should continue to rise. The International Monetary Fund forecasts that developing economies will expand more than 6% this year and at the same rate again in 1998, double the expected pace of growth for the industrialized world. Such robust growth, along with a widespread feeling among analysts that many emerging markets remain undervalued, will stoke investor interest and propel new entrants onto the roster of the world's most valuable companies.

This year's Russian newcomers on the BUSINESS WEEK scorecard include not only the biggest and most liquid but also the most transparent companies on the market. Ranked No.106, Rostelekom, Russia's long-distance phone company, was among the first to provide investors with financial reports drawn up according to international accounting standards. Mosenergo, which provides power to the city of Moscow and ranked No.108 on the scoreboard, published Western accounts in mid-June. Lukoil recently published Western-audited figures for 1994 and 1995 and will release 1996 numbers in July. Even secretive Gazprom is now working with Western auditors.

Most Russian blue-chip companies are privatized state giants that have managed to transform themselves into competitive domestic or global players. Excitement over privatization is helping emerging-market stocks soar on the opposite side of the globe as well. Four of the top six companies on the BUSINESS WEEK scoreboard are public-sector Brazilian companies. Their stocks have risen in tandem with price hikes as the government fattens their profits to prepare them for full-scale privatization.

This year's No.1 company, telecommunications giant Telebras, rose a dramatic 109% in market value on the BUSINESS WEEK list. Investors snapped up the stock in anticipation of the its planned breakup and sell-off next year in what will probably be Latin America's biggest privatization. The $11.7 billion company earned $2.6 billion last year, and profits are expected to jump to $3 billion this year. Its privatization could pull in $25 billion in investments over the next three years, analysts predict.

While Russia and Brazil soared in 1996, markets elsewhere coped with volatility provoked by everything from local instability to a global slump in chip prices. Thailand suffered from investors' worries about the economy, where a bubble in the property market burst, hitting banks and other companies. The market value of Siam Cement, No.151, plunged 57%, more than any other listing on the BUSINESS WEEK scoreboard. At the same time, political unrest roiled the market in Indonesia.

WAVE OF EUPHORIA. Taiwan, too, was badly shaken when China launched missile tests near the island in March, 1996. But the market rebounded smartly after fears of a possible clash with China eased. The country's stock index, the TAIEX, rose 34% last year. Apart from the calmer political waters, Taiwan's inclusion in Morgan Stanley Capital International indexes sparked a wave of euphoria as foreign institutions channeled more of their funds into the market.

Electronics shares performed particularly well, and among Taiwan's listed companies, investors viewed them as less risky yet still undervalued picks. For example, Acer Inc., Taiwan's leading electronics group, jumped 127% in value, moving from No.190 to No.81 on BUSINESS WEEK's list. After stemming losses in the U.S., Acer is expected to lift its earnings 30% to 40% this year, says Jeffrey Liang, head of research at Nomura Securities in Taiwan.

In Korea, by contrast, electronics companies were hit hard by last year's 80% fall in prices of computer dynamic random-access memory chips (DRAMS). Korean companies also suffered from the weakness in the Japanese yen, which boosted the competitiveness of Japanese rivals in autos, steel, shipbuilding, and petrochemicals as well as chips. Profits at Samsung Electronics Co. dove 93%, to $184 million, on sales of $17.8 billion, as Samsung slipped 11 notches down BUSINESS WEEK's scoreboard, to No.24. SK Telecom fell even further--down 103 places, to No.144 in the scoreboard. Deregulation played a part. The company lost its monopoly on cellular-phone services last April, and investors fear it's not ready to take on new competitors.

INDIA'S HOT ITEM. After a rocky 1996 and first quarter of 1997, Korea's market is now recovering. The KOSPI index is up 22% since its low in March. Indeed, Korea is one of several emerging markets where analysts bet on a continued upswing. They are also encouraged by South Africa, where the government is now easing exchange controls and is expected to speed up privatization soon. And analysts are high on India, where interest rates are falling and the economy should grow 6.5% this year. One hot stock is Hindustan Lever Ltd., a maker of personal-care products that ranked No.45 on BUSINESS WEEK's list. Investors are betting that rising incomes in India will fuel a surge in consumer spending.

As the U.S. market continues to ride high, daring investors will no doubt keep up their search for hidden values in emerging markets. ''The emerging markets offer an upside potential that doesn't exist in the U.S.,'' says Douglas Johnson, senior international investment strategist for Merrill Lynch in New York. In Russia, farsighted investors are looking beyond Gazprom and other blue chips to smaller telecom companies and utilities. In Brazil, they're eyeing private companies. Next year's emerging-market stars are already in the making.

By Patricia Kranz in Moscow, with Dave Lindorff in Hong Kong, Ian Katz in Sao Paulo, and bureau reports


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Updated June 27, 1997 by bwwebmaster
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