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Emerging Markets Can Be A Snake Pit


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EMERGING MARKETS CAN BE A SNAKE PIT

Back in 1993, they were called "emerging" markets. Following the Mexican meltdown in late 1994, they became "submerging" markets. Now, the stock and bond markets of Latin America and Asia are once again being heralded--this time as "reemerging" markets. Let's hope they get it right this time.

For the sake of widows and orphans and the rest of us who find pension fund managers investing our retirement money in what used to be called the Third World, a little sanity and savvy is in order. Blindly throwing cash at emerging markets in an effort to chase higher rates of return was a costly mistake. Fiduciary responsibility, if not simple common sense, requires a more level-headed approach.

Take the notion of risk. During the last round of overseas investment, there wasn't much awareness of it. Carried away by the globalization of the market economy and high growth rates, money managers socked nearly $100 billion into Mexico, China, Taiwan, Argentina, Chile, etc., over three years. With deregulation, privatization, and foreign investment, the economic opportunities in these countries appeared endless.

Then reality struck. Politics, ignored by the money managers, overwhelmed economic considerations in Mexico, as an election led to financial manipulation. Mexican capital began to flee, followed by U.S. and other foreign "hot" money. The peso collapsed, cratering stock markets around the emerging-market world. These markets are now on the rebound, but they have yet to fully recover (page 68).

It certainly makes sense to invest in the 3 billion new customers entering the global economy. Growth rates will be higher than in the more mature economies of the West for decades to come. Some of the best prospects for healthy earnings are in emerging markets.

But the risk/reward ratio remains higher in Latin America and Asia, and money managers should recognize this cold, hard fact. Taiwan's economy is booming, but its stock market is off 40% this year. China is so angry at Taipei's moves toward greater independence that it is testing missiles just 100 miles offshore. The military is challenging the civilian government in Chile, Argentina's Finance Minister is talking darkly of corrupt "mafias," and a religious party recently canceled a key energy deal with a U.S. company in India.

Money managers taking a second shot at higher returns in emerging markets would be wise to hire a few political risk analysts, a couple of area specialists, and even one or two people who know something about military affairs. Political stability is as important as economic opportunity when investing in societies striving to make the difficult transition to capitalism and democracy. Growth is not enough.


Steve Ballmer, Power Forward
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