Emerging markets: Time now to ride an upswing?

At times, an investor can gain by going global, tapping into less-developed regions of the world.

That certainly proved true early this year for investors of emerging-market funds, which grew, on average, by 10 percent in January.

But the euphoria was somewhat dampened last month, when Turkey's currency went into a tailspin, serving to remind investors of the risks.

Turkey abandoned exchange rate controls Feb. 22 and floated its currency on the free market in response to a political crisis. The Turkish lira tumbled 36 percent.

But unlike the Mexican, Russian, and Asian crises of the past decade, Turkey's financial woes have not spilled heavily over its borders.

"The country is geographically isolated, and has fewer trade links with other emerging markets," says Gabriel Pressler, an analyst with research firm Morningstar Inc.

She notes that emerging-market fund managers have largely ignored the country, preferring to invest in Asia and Latin America. "Just 4 of the 83 emerging-market funds we cover devote more than 5 percent of assets to Turkey," Ms. Pressler says.

Avoiding Turkey proved to be a good move for Sam Wilderman, portfolio manager of the GMO Emerging Market Fund, which is up 10.9 percent so far this year.

"Our performance has been this good because we're completely out of Turkey this year," he says. "Our quantitative analysis and fundamental judgment has had us very worried about the currency regime put in place."

While average returns on emerging-market funds did drop in February, they are still up 3.1 percent for the year, far exceeding the Standard & Poor's 500 Index, down 6.1 percent through Feb. 28.

And some analysts are optimistic about the short-term future for these funds. "Emerging markets are significantly undervalued, and I think they will outperform the world market this year, " says Riccardo Barbieri, Morgan Stanley Dean Witter & Co.'s London-based senior economist for global emerging markets.

Mr. Barbieri believes emerging-market stocks were oversold in the fourth quarter of last year, making them a good value now.

But Sevgi Ipek, New York-based manager of the Citizens Global Equity Fund, believes January's emerging-market rally was more due to two interest-rate cuts in the US than fundamentals. Ms. Ipek has increased her fund's exposure to emerging markets from 3.5 percent last year to about 6 percent this year.

"You have to know when to get in and when to get out," she says. "These are highly volatile markets and can follow a boom-bust scenario one year to the next. If you can catch emerging markets at the right time of the cycle the returns can be very high."

Some analysts also forecast emerging markets will get a boost in the second half of this year, when the US market is widely expected to recover from its early doldrums.

Still, the prospect of a slowing US economy will have mixed effects on emerging markets for now, says Graham Stock, head of Sovereign Strategy for Latin America at JP Morgan in New York.

Countries with the closest trade ties to the US - those in Southeast Asia, along with countries like Mexico and Chile - will be most affected by a US downturn or recession, he says.

Commenting that emerging-market funds continue to be some of the most volatile offerings around, Morningstar's Pressler cautions investors to tread carefully.

"There's no clear answer to the question of how much of an investor's portfolio should be invested in these funds. It really depends on what level of risk an individual is prepared to accept," she says.

"These are incredibly volatile markets and emerging-market funds have routinely shed as much as a third of their value in a quarter."

(c) Copyright 2001. The Christian Science Publishing Society