Funds cut emerging market exposure<\/p>\n
LONDON (Reuters): The continued deterioration in Asian
\nfinancial markets is prompting a broad retreat from all emerging
\nmarket stocks, London-based fund managers said on Friday.<\/p>\n
Fears that Indonesia will not toe the line on IMF-imposed
\nreforms and that Asian borrowers may not be able to meet debt
\nobligations have sparked a week-long selloff in emerging market
\nequities.<\/p>\n
\"The wind from Asia is so strong there is no way the other
\nmarkets can fight it,\" said Francesco Bertoni, head fund manager
\nof Invesco's $2.5 billion emerging portfolio.<\/p>\n
\"People who would like to allocate money, including us, will
\nprobably hold on at the moment and wait until the situation in
\nAsia is not as acute.\"<\/p>\n
Some major investors are cutting emerging markets out of their
\nportfolios entirely -- at least for now.<\/p>\n
\"We are finally getting out of our Latin America positions
\nthis week,\" said Tony Robinson, fund manager in charge of Lombard
\nOdier's $5 billion global equity portfolio.<\/p>\n
Robinson expects to have sold his last one percent of emerging
\nmarket equities by the end of Friday, closing a position that hit
\na peak of about seven percent in mid-1997.<\/p>\n
\"Established markets will win the asset allocation battle
\nuntil these things are sorted out and stability returns,\" he
\nsaid.<\/p>\n
Bertoni sees Latin America and emerging Europe as
\nfundamentally sound, but is unwilling to fight that battle now.
\nJanuary has historically been a good month for emerging markets,
\nas higher allocations from fund managers underpinned share
\nprices.<\/p>\n
But 1998 will be different, fund managers said.
\n\"This year is not very likely to see the usual January effect,\"
\nsaid Bertoni.<\/p>\n
At the margins, funds will be allocated to cash or to
\nestablished markets equities.<\/p>\n
Valuations in non-Asian emerging markets are reasonable now,
\nhe said, \"but risk premium is the name of the game.<\/p>\n
\"People are happier paying 19 times earnings in the U.S.
\nrather than eight or nine times in Brazil because the risk is
\nperceived to be a lot lower. Valuations have to get to ridiculous
\nlevels or that perception has to change (before the market can
\nturn),\" he said.<\/p>\n
And the outlook for emerging markets will not be helped if
\ndeveloped markets continue to lose ground.<\/p>\n
\"I can't see Latin America going up if Wall Street doesn't. It
\nis not a common pattern.\"<\/p>\n
British funds, which have suffered from an overweight position
\nin Asia, are not likely to move much of their substantial cash
\npositions into emerging markets soon, according to Michael
\nHughes, group economic adviser at BZW.<\/p>\n
In the absence of an easing of interest rates in the United
\nStates, a move back to emerging markets will be predicated on a
\nreturn to relative stability in Asia, he said.<\/p>\n
But stability in Asia will be difficult to achieve until the
\nenormous foreign debts of countries and corporations are dealt
\nwith.<\/p>\n
\"We have seen the recorded debt of Korea double in a week, we
\nhave seen the external liabilities of a lot of Thai companies to
\nbe much greater than reported,\" said Hughes. \"We need due
\ndiligence.\"<\/p>\n
Robinson said Asian debt rollover negotiations would hang over
\nthe market for much of 1998.<\/p>\n
\"To buy emerging markets again I'd need to see a return to
\ncurrency stability, which is not happening, and evidence that the
\ngovernments in Asia are willing to take the medicine laid down by
\nthe IMF.\"<\/p>\n
So even if stock markets in Asia continue to fall, fund
\nmanagers say it will be difficult for them to buy until they have
\nthe information needed to justify the decision.<\/p>\n
\"Asia has had a fall well beyond what it should, but you can
\nsee the reason,\" said Bertoni.<\/p>\n
\"There is a total uncertainty about earnings. Risk premiums at
\nthe moment are incredibly high but there is no way to measure
\nthat.\"<\/p>\n
He sees a sustained rally in Asia only when the fundamentals
\nare made clear.<\/p>\n
But few are willing to time that, and allocations within
\nemerging markets will be skewed towards Europe and Latin America
\nin the near-term.<\/p>\n
Right now, however, fund mangers are trying to keep their
\nheads extremely low.<\/p>\n
\"There is no point in trying to fight the tape at this point,\"
\nBertoni said.<\/p>",
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