JULY 12, 1999
INTERNATIONAL -- INT'L COVER STORY

Emerging Markets Re-Emerge

Asia leads the way, as investors regain their enthusiasm for venturing abroad

Dead. Over. Done with. That pretty much summed up the attitude of portfolio investors for the last two years towards emerging markets, which they avoided like the plague. Investing in Thai banks, Russian oil pumpers, and Johannesburg gold miners looked like a formula for losing money. And it was. But something happened in the last six months: Investors rediscovered the thrill of making high-stakes bets on those very emerging-market bourses they recently spurned. The return of enthusiasm for venturing abroad is clearly reflected in BUSINESS WEEK's 1999 list of the world's top 200 emerging-market companies, ranked by market capitalization by Morgan Stanley Capital International.

Asia is benefiting from the biggest dose of optimism. Skeptics say the recovery looks slow, unsteady, and fraught with pitfalls. But optimists counter that the region has clearly pulled back from the precipice. Lower interest rates, low inflation, economic growth, and good corporate earnings forecasts--not to mention bold attempts at reform in countries such as South Korea and Thailand--make a hot story for stockpickers. ''It's fair to say large parts of Asia have 'gotten it' and are going forward,'' says Gary Greenberg, emerging-market portfolio manager for Van Eck Associates in New York. ''We've got a sweet spot for Asia right now.''

No kidding. Of the top five companies on this year's list, three are from Asia--compared with just one last year, cash cow China Telecom of Hong Kong. Big upward bounces in currencies also supported the Asian surge. The Indonesian rupiah, for example, is finally off life-support: It was up 40% by the end of May compared with a year ago.

Asian companies aren't the only winners, however. The No. 1 spot on this year's list goes to Mexico's Telefonos de Mexico, known as Telmex. As a proxy for the whole economy, the blue-chip company has benefited from an overall 45% climb on the Mexican bourse this year. Investors love the Telmex story: Company chief Carlos Slim actually delivers on phone service, boosts profits, and even buys back shares like a U.S. corporate boss. Wall Street forecasts 3% growth this year for Mexico, as analysts realize that the economy is increasingly part of North America rather than Latin America, and put the Mexican market at the top of their stock picks.

South of Mexico, though, the picture isn't so pretty. The real's implosion has hit Brazilian companies hard, and the rest of the continent has felt the impact, too. Only the recent uptick in oil prices, from $10 to $12 a barrel last year to $16 to $18 a barrel now, has relieved the gloom by keeping Petrobras and Argentina's YPF in the Top 10. Although all the Latin American bourses will feel tremors from the Federal Reserve's expected rate hike, there's optimism that South American emerging markets will follow the route of Asia's recovery by the end of this year.

Even in Russia, confidence is returning after last summer's catastrophic collapse of the ruble. While most Russian companies slipped in rank on our list, and four fell off the list altogether, the 75% devaluation of the ruble and the jump in energy prices gave a boost to exporters. The big beneficiaries: gas giant Gazprom (No. 3) and oil majors Lukoil (No. 33) and Surgutneftegaz (No. 74). Lukoil and Surgut saw their costs fall by nearly half since the beginning of 1998, thanks to the devaluation.

CURRENCY BONANZA. A fall in the local currency also yielded benefits to South African companies, which are still suffering from the plunge in world gold prices. The 20% drop in the rand helped the mining industry offset losses, since operating costs are priced in rand and minerals are sold in dollars. The devaluation also boosted exports, while a government policy of fiscal restraint also improved fundamentals. South African companies acted prudently too. Anglo-American Corp., for example, restructured itself to focus on its core mining operations. Anglo-American's reward: a nice jump in the rankings to No. 6, up from No. 11 last year.

But emerging markets aren't just commodity plays. High tech has its place on the list as well. Taiwan is a big winner this year, with 33 companies earning a spot. That's partly because Taiwan's biggest market is in the thriving U.S., where PC growth has remained steady. And multinational hardware and semiconductor companies are outsourcing more manufacturing to Taiwan's makers of special chips, PCs, motherboards, and notebooks, including Acer, TSMC, Quanta, Asustek, Compal, Inventec, Arima, and Compeq. All are seeing substantial increases in orders from U.S. clients. Says Barry Lam, CEO and founder of Quanta, which arrived on the list with an initial public offering this year: ''The U.S. market is growing so well, and most of the PC companies in Taiwan are doing a good job at keeping up with the trends.''

South Korea--a bombed-out economy just 12 months ago--has also found new strength. The Korea Composite Index is up 80% this year. Lower interest rates have switched local investors' focus from bonds to the equity markets. The government's restructuring of the financial system has turned Korean banks into key beneficiaries of the recovery. Kookmin Bank (debuting at No. 88 this year) benefited from a 22% purchase by Goldman, Sachs & Co. and saw its stock price rocket eightfold since the dark days of crisis.

SEOUL SURVIVORS. Korean blue chips fared well in the new environment of optimism, with LG Electronics, Samsung Display Devices, and Hyundai Motor Co. all returning to the list, after dropping off during the crisis. Utility Korea Electric Power Corp. (KEPCO, No. 5), a government monopoly, is in the process of preparing a stock selloff to the public. To pretty itself up, it has embarked on a cost-cutting effort, thus driving up earnings and cash flow. Korea Telecom (No. 8), the backbone of the telecommunications sector, has also sold shares to outside investors. Korea Telecom and Posco (Pohang Iron & Steel, No. 24), have their place among what investors consider to be the best buys in the region. ''There's been a lot of differentiation between good and bad companies,'' says Yun Seok, director of equity research at Credit Suisse First Boston in Seoul.

Asia's rebound propelled Southeast Asian markets too. Of Indonesia's five companies on the Emerging Market 200 list, four of them returned after having fallen off for the last two years. In Thailand, bank stocks were among the first to recover, as investors considered them bellwethers of an improving economy. Thus, Krung Thai Bank and Siam Commercial Bank climbed back onto the list after an absence of three years as hope returned that banks could clean up their books and start lending prudently. Says Bruce Steinberg, Merrill Lynch & Co.'s chief economist: ''We're past the point where contagion is going to happen again.'' And past the point where investors flee en masse from emerging markets.

By Sheri Prasso in New York, with Elisabeth Malkin in Mexico City, Jennifer Veale in Seoul, Jonathan Moore in Taipei, Kathy Chenault in Johannesburg, and bureau reports