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Free Market Reforms Are Bearing Fruit (Int'l Edition)


International -- Cover Story: THE BUSINESS WEEK GLOBAL 1000

FREE MARKET REFORMS ARE BEARING FRUIT (int'l edition)

After two tough years, emerging markets are back

For a spectacular corporate leap forward, it would be hard to match the performance of Kimberly-Clark de Mexico. The paper products maker, 46% owned by Dallas-based Kimberly-Clark Corp., jumped from No. 132 in 1995 to No. 48 this year on BUSINESS WEEK's annual scoreboard of the top 200 emerging-market companies, ranked by market value. Despite Mexico's recession, its share price zoomed 78%, to $18, reflecting the company's success in gaining market share as well as expected benefits from its planned merger with Scott Paper Co.'s Mexican unit.

On the Pacific's other rim, the Philippines is Asia's rising economic star. Riding the islands' strong economic growth, earnings of utility Manila Electric Co. rose to $168 million in 1995, up 29% over 1994, and should rise an additional 18% this year, predicts Nigel Webber, portfolio manager for Crosby Asset Management in Hong Kong. "It's a good proxy for the Philippines economy," says Cristina Lam, a director of portfolio management at Crosby.

NEW DYNAMISM. The good times at both companies show how important free-market reforms are to business performance in emerging markets. In the Philippines, the shift to a freer market is generating new dynamism in an economy that was long Asia's laggard. And Mexico, by sticking to its reform course through the peso crisis, appears to be growing again.

After two years of hard slogging, many emerging economies are back on track and the numbers measure the progress. For companies in the BUSINESS WEEK ranking compiled by Morgan Stanley Capital International Inc., total market value at the end of May rose to $858 billion. That's up 16.3% from $738 billion 12 months earlier. This year, for the first time, MSCI has provided a broad range of new information for each company including sales, profits, price/earnings ratios, and asset values. Market value is calculated by multiplying the share price times the total number of shares outstanding, including those held by governments.

Again this year, Korean heavyweights dominate the rankings by several basic measures, reflecting the country's industrial prowess. While utility Korea Electric Power maintained its grip as No.1 in market value, Samsung Electronics led the rankings both in sales, totaling $20.5 billion, and profits, with $3.2 billion. The runner-up in sales was Brazil's state-run oil company Petrobras, but the rest of the top five revenue producers were Korean: Hyundai Motor, Korea Electric, and Pohang Iron & Steel.

In return on equity, Rothmans of Pall Mall (Malaysia), No. 108, easily swept the field with an astonishing 164%. The highly profitable company paid out a special cash dividend to stockholders from the huge reserves that it had accumulated. Asia's semiconductor boom placed three chipmakers in the top five--Taiwan Semiconductor, Samsung Electronics, and Taiwan's United Microelectronics--with returns ranging between 42% and 53%.

"SEXY STORIES." Apart from individual companies' performances, share prices and market values have been pushed up broadly in recent months in many emerging stock markets, driven by rising confidence among local and foreign investors after two cautious years. Another measure of emerging-market health, the International Finance Corp.'s (IFC) stock price index, climbed 10% this year through mid-June. Big gains included 37% for companies in India, 29% for Taiwan, and 16% for Brazil. Some of the biggest leaps were in the newest market economies: 74% in Hungary, for example, and 59% in Poland.

The current upturn may be just the beginning of an emerging-markets rebound that could run well into 1997, many analysts say. "My theory is that the U.S. market is overpriced and very speculative," says Barton M. Biggs, head of global strategy at Morgan Stanley Asset Management Inc. Mutual-fund investors, he says, "are going to switch at the margin from the U.S., where they're not making any money, into international in general, but particularly into the area where the really high-growth and sexy stories are, which is the emerging market."

Such a shift by U.S. investors would add impetus to a surge of money from rich developed countries into emerging markets that is already under way. Michael J. Howell, head of global investment at ING Barings, estimates that the influx will total $50 billion this year, second only to the previous $62 billion peak in 1993 (chart).

The underlying force driving the emerging-market rallies is not volatile international money flows, but competitive gains from market reforms and corporate restructuring. As a result, says Joyce E. Cornell, lead portfolio manager for Scudder, Stevens & Clark Inc.'s Emerging Markets Growth Fund, stocks in many markets are now low-priced compared with their earnings. "You've had the deepening of political and economic reforms, and much higher earnings, at the same price," she says.

In Asia, stock prices rose an average 14% in the first 5 1/2 months. But there's a wide divergence among countries: Korean stocks, for example, were down nearly 9%. Crosby Asset's Webber is decreasing his allocations to Hong Kong, Singapore, and Thailand in favor of "more emerging" Indonesia and the Philippines, which are playing catch-up to the more advanced Tigers. Two of the highest fliers on the scoreboard are Indonesian cigarette makers Gudang Garam, No.22, up 119%, and H.M. Sampoerna, No.40, up 73%. They are cashing in on rising consumer demand in a country with 190 million people. Stephen Partono, Goldman, Sachs & Co.'s Singapore-based analyst for Indonesia, expects phone company P.T. Telekom, No. 7, to get an earnings boost from an expected 35% increase in domestic lines this year. He warns, though, that the uncertainty about the eventual succession to President Haji Mohamed Suharto poses "significant political risk."

Korea's companies have sagged since April because of investor worries that the weakening Japanese yen will hurt Korea's crucial exports and balloon its trade deficit. Among likely losers are shipbuilders such as Samsung Heavy Industries. And the Bank of Korea, by pushing the won down to help exports, could stoke inflation. But a boom in government construction is benefiting companies such as Hyundai Engineering & Construction Co., which ranks No. 114.

In Mexico, among the best-positioned businesses are conglomerates with subsidiaries that export and other units that supply the reviving domestic market. One such is Grupo Carso, No.30, which owns major mines and a big cigarette business.

Brazil's state-controlled phone companies, including high-flying Telebras, No.2, and Telesp, No.11, are getting a lift from last fall's rate hikes, which are paving the way toward eventual privatization. The increases and the prospect of huge growth in Brazil's underserved telecommunications market have sharply boosted revenues and share prices.

NEW FRONTIERS. Some of the most dynamic emerging-market companies are in countries that have just joined the market-economy club. In Poland, for example, earnings gains range as high as 100%. Some of the hottest growth sectors are food, pharmaceuticals, construction, and banking.

On June 20, the IFC announced that it is adding Russia, Morocco, and Egypt to the 27 markets it tracks with daily indexes, and 14 "frontier" markets--from Lithuania to Botswana to Jamaica--that it will follow with monthly indexes, for a total of 44. "All of a sudden, there's a lot of activity in areas where there hadn't been much," says Robert Shakotko, the IFC's database manager. Asian and Latin American companies may soon find themselves jostling for position on the scoreboard with upstart companies in these fledgling markets.By John Pearson in New York, with bureau reportsReturn to top


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