BUSINESSWEEK ONLINE : JULY 31, 2000 ISSUE
BUSINESSWEEK INVESTOR Biotech Is Back from the Dead (int'l edition) But health-care funds may cool off next quarter What kind of company makes no money but promises fantastic growth, has a better chance of failure than success, and still lures investors? Hint: it's not dot-coms. That's right, biotech is back. It's a strange time. After dot-com stocks were left pretty much for dead in April, investors seized on news that scientists had nearly completed mapping the human genome, opening the way for tremendous medical advances--one day. ''What this says is that the market is hungry for future growth stories,'' says managing director of the $1.2 billion GMO Emerging Markets Fund, Arjun Divecha, who, by the way, doesn't invest in biotech. Maybe he should. In our quarterly survey of offshore mutual funds, 12 of the top 20 performers invested in global health care. Amid the general pummeling of markets, such funds earned respectable returns, ranging from 12.35% to 22.96% for leader of the pack, the Oppenheim Pharma/wHealth fund. The worst performers were mostly invested in Japan and the emerging markets of Asia and Eastern Europe. Their losses ranged from 41.61% to 20.26%. Offshore funds don't file reports with the U.S. Securities & Exchange Commission and aren't marketed in America. But their performance reflects decisions by U.S. and international investment pros. We track the world's 500 biggest equity funds quarterly, using data from Standard & Poor's Micropal (like BUSINESS WEEK, a unit of The McGraw-Hill Companies). The latest performance data on these and other equity and fixed-income funds are available at www.micropal.com. TOUGH MEDICINE. Of course, investors have rushed into and out of health-care stocks before. In early March, for instance, when President Bill Clinton and British Prime Minister Tony Blair said that human genome research ought to be made public and not protected by patents. Biotech stocks fell, until the two retracted their statements. Moreover, announcements of new drugs for everything from diabetes to Alzheimer's have caught investors' attention. Recent mergers between pharmaceutical heavyweights Pfizer and Warner-Lambert and between Pharmacia & Upjohn and Monsanto, for example, seem to be paying off, keeping the sector buoyant. And pharmaceuticals are standard defensive plays at times, such as now, when interest rates are rising and the U.S. economy is slowing. All the same, ''it's hard to see the pharma group as a whole putting in the same sort of performance in the coming quarter,'' says Ian Scott, European equity strategist at Lehman Brothers in London. Even the portfolio manager at our leading fund, Sam Isaly, says that his return of nearly 23% is repeatable--but perhaps not in the next few months. So where should international investors look for returns next? Most professionals are pleased with what they see in Europe. ''Domestic consumption is buoyant and consumer confidence is at a high level,'' says Carlo Monticelli, co-head of Euro-area economics at Deutsche Bank in London. ''We think there can be a long phase of sustainable growth in Europe.'' Rates of 3.75% this year and 3.5% next are quite possible. Not too long ago, people figured that if the U.S. economy falters, Europe would too, since its growth was driven by exports. Not now. ''Europe can keep up,'' says David Bowers, global investment strategist for Merrill Lynch in New York. Still, most fund managers are sticking with more defensive stocks. Scott, for example, recommends Italian oil company ENI. It has a price-earnings ratio of 14 for 2000 and is trading at $5.56. He also likes Danish brewer Carlsberg, which has a p-e of 12.4 and goes for $33.89 a share. Tim Harris, European equity strategist at J.P. Morgan in London, recommends food and beverage companies such as Anglo-Dutch Unilever, Nestle in Switzerland and Danone in France. ''We are seeing upgraded earnings growth in this sector, as well as restructuring,'' he says. Both Scott and Harris caution against investing in European telecom and media. For one thing, they're down 20% and 18.5%, respectively, in the quarter. For another, they still look overvalued compared with their U.S. peers, Scott says. If you want to invest outside of western Europe, consider Russia. High commodity prices, low valuations, and genuine political reform have conspired to make Russia as attractive as it has been for years. Oil company Lukoil is a favorite of Helge Rechberger, head of equity market research for Raiffeisen Zentralbank in Vienna. He is predicting that earnings could grow by 20% for the year. Russia is also a favorite of GMO's Divecha. JAPANESE REBOUND? In Japan, uncertainties remain about the economy. The recovery is still nascent and corporate restructuring is tenuous. But some pros are starting to believe that the worst may be over. At least for the stock market and at least for this year. The Bank of Japan didn't raise interest rates in mid-July, as feared. Forecasts that the economy could grow by as much as 2.5% in the fiscal year ended March, 2000, seem plausible now. Meanwhile, company earnings grew 26% in the 1999 fiscal year, says Garry Evans, equity strategist with HSBC Securities Japan in Tokyo. And they could grow another 20% this year. Valuations of Japanese companies are more reasonable than they have been in some time, too. ''The days of p-e ratios of 100, 200, or 300 are over,'' says Chris Wolfe, head of equity strategy for J.P. Morgan's private bank in New York. Evans likes electronic companies NEC, Sharp, Pioneer, and Kyocera for this reason. But stay away from Japanese banks. In the days since department store chain Sogo declared bankruptcy, financial stocks have dropped some 5%. On July 18, they fell to a 52-week low. And many analysts believe that more corporate failures loom. OFF THE MAINLAND. Staying in Asia, Taiwan and Hong Kong offer investors the most promising opportunities. Adaline Ko, a director at Lloyd George Management in Hong Kong, says there's no reason to look anywhere else. She likes Taiwan Semiconductor Manufacturing because the demand for semiconductors is likely to remain robust, even with a slowdown in the U.S. economy. And Anil Daswani, head of Hong Kong research at Salomon Smith Barney, says that telecom stocks are bouncing back after April's lows. He favors Hutchison Whampoa, which just sold part of its U.K. mobile phone unit to Japan's NTT DoCoMo. And together they may bid for VoiceStream Wireless in the U.S. If you want to invest in South Korea, it may be better to wait a while. ''The next couple of months will be marked by painful banking restructuring and corporate liquidations,'' says Lee Jeong Ja, a strategist at HSBC Securities in Seoul. ''It's time to focus on what to avoid rather than what to pick.'' In Latin America, most professionals believe Brazil is the place to invest these days. The market could grow as much as 40% over the next 12 months, says Jorge O. Mariscal, chief investment strategist for Latin America at Goldman Sachs in New York. He likes telecom companies such as long-distance operator Embratel as well as Telesp Celular. ''We think they're very cheap, and the improvements in efficiencies are tremendous,'' he says. Cheap, efficient, value. These words may sound old-fashioned. And certainly they don't apply to biotech stocks. But you should be hearing them more often in the next few months. By SUSAN BERFIELD With David Fairlamb in Frankfurt, Brian Bremner in Tokyo, Heidi Dawley in London, Elisabeth Malkin in Mexico City, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Biotech Is Back from the Dead (int'l edition) TABLE: Top Sectors TABLE: How the Biggest Funds Fared TABLE: The Best Offshore Mutual Funds TABLE: The Worst Offshore Mutual Funds INTERACT E-Mail to Business Week Online

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