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The Action In Emerging Markets


The Corporation: THE BUSINESS WEEK GLOBAL 1000

THE ACTION IN EMERGING MARKETS

It's been a rough year for companies in the world's emerging markets: The abrupt devaluation of Mexico's peso in December undermined confidence in economies from Latin America to Asia. For the 26 developing countries tracked by International Finance Corp. (IFC), the overall market plunged 15% in the first quarter--and was still down 9% by May 31.

But there are plenty of bright spots in the emerging-market tableau. Asian markets have fully recovered, although Latin American markets were still off 21% at the end of May. And despite this year's rocky start, emerging-market equities will still attract net inflows of some $25 billion in capital this year, says Michael Howell, director of global strategy at London-based Baring Securities International Ltd.

BUSINESS WEEK's roster of the top 100 emerging-market companies, compiled by Morgan Stanley Capital International Inc., highlights the performance of leading corporations in the most dynamic, if volatile, economies. Ranked by market value, many of these companies are becoming global players in their own right.

Currency influences how the companies rank. Euphoria over Mexico had led many U.S. investors to buy dollar-denominated equities, such as American depositary receipts of Mexican phone company Telmex, thinking of them as dollar stocks. But Telmex lost 55% of its market value in the year to May 31 and dropped from No.1 to No.3 on the Scoreboard. By contrast, Asia's stronger currencies are a key to that region's better performance.

A few Mexican companies are benefiting from strong dollar exports: One such, copper miner Grupo Mexico, has seen its market value rise by 97%. But values are down 50% or more even for well-run companies that depend mainly on the depressed domestic market, such as retailer Cifra.

Argentine companies, hurt by shock waves from Mexico's debacle, are still depressed by lingering worries about Argentina's peso. But elsewhere in Latin America, the outlook is brighter. In Brazil, economic recovery and free-market reforms, including broad privatization plans, have lifted values of state-controlled companies such as mining giant Vale do Rio Doce and electric holding company Eletrobrs, which rose to No.4 on the Scoreboard.

Meanwhile, Asia's ascendancy among the emerging markets is symbolized by Korea Electric Power Corp.'s rise to the top of the Scoreboard, replacing Telmex. But highfliers such as Samsung Electronics Co. exemplify the high-tech drive that is powering Korea's economy. With an 80% jump in market value, the company leaped from No.20 to No.7.

With economic growth now strong throughout Asia, stock-picking based on industry-sector prospects and company fundamentals is becoming more important than faddish trends such as the fading Mexican "tequila effect." In Taiwan, too, electronic producers are strongest. Integrated-circuit maker United Micro Electronics Corp., for example, rose 81% in market value.

Again this year, Thailand's banks are impressive performers, led by Krung Thai Bank with a 72% jump in market value. In Malaysia, where gross domestic product is rising 8% to 9% this year, "we're saying go for the infrastructure sector," says regional strategist Peter Churchouse at Morgan Stanley in Hong Kong. But Telekom Malaysia, No.2 on the Scoreboard, rose only 4% in market cap because it's losing its former monopoly status. For the same reason, electric utility Tenaga Nasional, No.5, lost 21%.

India's main attraction is the fast rise in corporate profits, growing at a pace "probably higher than anywhere in Asia," Churchouse says. Truckmaker Tata Engineering & Locomotive Co. had its most profitable year ever. India's problem, Churchouse adds, is that "the market keeps getting set back by things unrelated to corporate earnings," such as an insurrection in Kashmir. In South Africa, political confidence instilled by the April, 1994, national elections also triggered a surge of activity. Renewed GDP growth is fattening profits of industrial conglomerates such as Anglo American Industrial Corp., up 29% in market value.

Wide swings in markets are the rewards and hazards of investing in developing nations. Boston fund analyst Micropal Inc. calculates that $100 invested on Dec. 31, 1984, in the IFC's Global Index, which reflects the performance of 1,449 emerging-market companies, would have grown to $528.07, including reinvested dividends, by June 22 of this year. The same investment in Morgan Stanley Capital International's World Index of 1,577 companies in developed markets would have grown to $461.91. The difference tells why investors will keep putting money in emerging markets, despite their ups and downs.By John Pearson in New York, with bureau reports


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