Funds cut emerging market exposure

Funds cut emerging market exposure

LONDON (Reuters): The continued deterioration in Asian financial markets is prompting a broad retreat from all emerging market stocks, London-based fund managers said on Friday.

Fears that Indonesia will not toe the line on IMF-imposed reforms and that Asian borrowers may not be able to meet debt obligations have sparked a week-long selloff in emerging market equities.

"The wind from Asia is so strong there is no way the other markets can fight it," said Francesco Bertoni, head fund manager of Invesco's $2.5 billion emerging portfolio.

"People who would like to allocate money, including us, will probably hold on at the moment and wait until the situation in Asia is not as acute."

Some major investors are cutting emerging markets out of their portfolios entirely -- at least for now.

"We are finally getting out of our Latin America positions this week," said Tony Robinson, fund manager in charge of Lombard Odier's $5 billion global equity portfolio.

Robinson expects to have sold his last one percent of emerging market equities by the end of Friday, closing a position that hit a peak of about seven percent in mid-1997.

"Established markets will win the asset allocation battle until these things are sorted out and stability returns," he said.

Bertoni sees Latin America and emerging Europe as fundamentally sound, but is unwilling to fight that battle now. January has historically been a good month for emerging markets, as higher allocations from fund managers underpinned share prices.

But 1998 will be different, fund managers said. "This year is not very likely to see the usual January effect," said Bertoni.

At the margins, funds will be allocated to cash or to established markets equities.

Valuations in non-Asian emerging markets are reasonable now, he said, "but risk premium is the name of the game.

"People are happier paying 19 times earnings in the U.S. rather than eight or nine times in Brazil because the risk is perceived to be a lot lower. Valuations have to get to ridiculous levels or that perception has to change (before the market can turn)," he said.

And the outlook for emerging markets will not be helped if developed markets continue to lose ground.

"I can't see Latin America going up if Wall Street doesn't. It is not a common pattern."

British funds, which have suffered from an overweight position in Asia, are not likely to move much of their substantial cash positions into emerging markets soon, according to Michael Hughes, group economic adviser at BZW.

In the absence of an easing of interest rates in the United States, a move back to emerging markets will be predicated on a return to relative stability in Asia, he said.

But stability in Asia will be difficult to achieve until the enormous foreign debts of countries and corporations are dealt with.

"We have seen the recorded debt of Korea double in a week, we have seen the external liabilities of a lot of Thai companies to be much greater than reported," said Hughes. "We need due diligence."

Robinson said Asian debt rollover negotiations would hang over the market for much of 1998.

"To buy emerging markets again I'd need to see a return to currency stability, which is not happening, and evidence that the governments in Asia are willing to take the medicine laid down by the IMF."

So even if stock markets in Asia continue to fall, fund managers say it will be difficult for them to buy until they have the information needed to justify the decision.

"Asia has had a fall well beyond what it should, but you can see the reason," said Bertoni.

"There is a total uncertainty about earnings. Risk premiums at the moment are incredibly high but there is no way to measure that."

He sees a sustained rally in Asia only when the fundamentals are made clear.

But few are willing to time that, and allocations within emerging markets will be skewed towards Europe and Latin America in the near-term.

Right now, however, fund mangers are trying to keep their heads extremely low.

"There is no point in trying to fight the tape at this point," Bertoni said.