Southeast Asian Markets Will Revive--Issue Is When

Will Southeast Asia’s shattered stock markets recover quickly, or are they doomed to suffer a prolonged hangover?

That’s the question confronting mutual fund shareholders who might be tempted to expand their Asian holdings following the collapse of key markets in recent months.

There’s little doubt that stock prices in the region will recover eventually as economic development continues, albeit at a slower pace. The key issue is how long the healing process might take.

Optimists think Southeast Asia will follow Mexico’s example of a sharp but fairly swift bear market. Mexico’s Bolsa index has nearly doubled in value since the market crashed in the wake of the December 1994 peso devaluation.

Conversely, pessimists fear the region could wallow Japanese-style. Eight years after peaking near 39,000, Japan’s widely followed Nikkei index is hovering around 16,000. Mutual funds that target Japanese stocks have fared better than the index, thanks to their ability to hold cash and avoid the most troubled industries. Yet they’re still down nearly 30% from the start of 1990, reports researcher Morningstar Inc. of Chicago.

Michael Gerding, who manages the Founders Passport and Founders Worldwide Growth funds in Denver, believes stock prices in places such as Thailand, Malaysia, Indonesia and the Philippines will follow in Japan’s footsteps.

“I think it will be a long, drawn-out process,” Gerding said. “I think it will take longer than most people expect.”

What triggered Southeast Asia’s crisis was the bursting of an “asset bubble” caused by years of easy financing that led to overpriced real estate, unwise industrial expansions and other inefficient uses of capital.

When bubbles burst, as occurred in Japan’s real estate market several years ago, people suffer a tangible drop in wealth, Gerding said. Already, this year’s stock market losses in Malaysia have exceeded the country’s gross domestic product of about $6,000 per person, he said.

Gerding also believes the banking systems in several Southeast Asian markets are now more fragile than was the case with Mexico three years ago. Speaking at a San Francisco investment conference sponsored by Charles Schwab last week he mentioned the possibility of a five-year bear market in Southeast Asia.

Josephine Jimenez, manager of the Montgomery Emerging Markets Fund in San Francisco and another speaker at the Schwab conference, agrees that bad-loan problems will rise. That’s why she has cut her fund’s exposure in Southeast Asia to 4%, excluding Hong Kong, down from 12% two years ago.

Yet Jimenez is more optimistic about the next couple of years than Gerding. She thinks the region’s economies will start to pick up steam again during the second half of 1998. She remains confident that Asian companies will be able to work off bloated inventories by boosting exports, especially now that their currencies have been devalued. Even if export growth stalls, which Jimenez doesn’t deem very likely, the economic crisis will pass within two or three years, she predicts.

Jimenez notes that the region is blessed with several strengths that enhance its long-term investment appeal. These include ample foreign currency reserves, a strong work ethic, high personal savings rates and proximity to China, a probable global economic powerhouse of the next century.

Nonetheless, she sees better prospects in places such as Russia, Turkey, Brazil, Venezuela and Mexico.

The way various fund managers are reacting to the Southeast Asian sell-off largely reflects their individual investment philosophies, said Tricia Oehme Rothschild, a Morningstar analyst.

Many growth-stock investors such as Gerding are pessimistic given the prospect of lower profits ahead, while some value investors are optimistic, attracted by the lower prices.

Mark Mobius, who runs the Templeton Emerging Markets and Templeton Developing Markets funds from offices in Hong Kong and Singapore, is buying Southeast Asian stocks.

“I think the best opportunities are in Asia right now,” he said, citing the sharp declines of recent weeks. “Many markets, especially those in Asia, are seeing attractive valuations for the first time in many years.”

Yet even Mobius cautions investors not to expect overnight profits. As happened in Mexico, “it takes two or three years to get the full benefit,” he said.

Even if you like the idea of investing in Southeast Asia, you still must decide how to go about it. Various types of regular mutual funds and closed-end portfolios offer different ways to play the region:

* Emerging-markets funds. These funds invest in Latin America, Eastern Europe and other regions in addition to Southeast Asia. Because they spread investor dollars among many countries, their diversification is broad. The danger with one of these portfolios is that a manager might have a light position in a region such as Southeast Asia just when the markets there take off.

* Regional funds. These represent a more concentrated way to bet on a region such as Southeast Asia, offering the potential for higher gains but with heightened risk.

* Single-country funds. These focus on the stocks of one nation, with the even greater volatility that entails. You can, however, build a portfolio composed of several single-country funds and possibly earn good overall results, since the manager of each fund is a true specialist in his or her market.

* Closed-end funds. These funds sell a limited number of shares to investors. As a result, the prices of closed-end funds often sell above or below the value of the portfolio holdings--at a premium or discount, respectively. This trait makes closed-end funds more complex than regular mutual funds but also potentially more attractive, since you will profit if a fund’s discount eventually narrows or evaporates completely.

Also, managers don’t have to worry about redemptions in closed-end funds, since shares are sold among investors in the open market.

Closed-end funds also offer various advantages for investing in small stock markets, which explains why the vast majority of single-country funds are of the closed-end variety.

You can also find regional and broad international closed-end portfolios, often managed by the same companies that run regular mutual funds.

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Russ Wiles is a mutual funds columnist for The Times. He can be reached at russ.wiles@pni.com