- The Washington Times - Tuesday, June 20, 2006

NEW YORK — U.S. investors have poured so much money into emerging markets that some on Wall Street are comparing it to the tech-stock bubble of the 1990s.

The parallels are there: A massive run-up that attracted hordes of investors, pushing prices up to the point where they are hard to justify.

In the worldwide sell-off from May until last Wednesday, when many markets began to recover, emerging-market losses were steep. Fears about higher worldwide interest rates and the next move by the Federal Reserve lopped $6.3 trillion in value off all markets, including the U.S. one, according to an analysis by Birinyi Associates, a stock research firm.

In the weeks between May 9 and June 13, stocks in Brazil fell 29.6 percent. Indian stocks fell 32.4 percent, tumbling from their all-time high, and stocks in Mexico dropped 24.7 percent, according to Birinyi.

In one month, foreign investors pulled $2.7 billion out of Indian stocks alone. The Bogota stock exchange shed 29 percent in a week, including a 10.5 percent drop in one day. Argentine stocks recently hit a six-month low. Chile’s benchmark Ipsa dropped 4.4 percent in one day, its sharpest one-day drop in seven years.

Almost all the emerging markets have since turned around, but the sell-off looked like a sign that emerging stocks might be steeply overvalued.

Until recently, their growth has been remarkable. Morgan Stanley Capital International’s 25-country Emerging Markets index jumped a whopping 35 percent in 2005, compared with a 5 percent gain for the Standard & Poor’s 500.

The returns were so good that some retail investors put 100 percent of their portfolios in emerging markets, said Quincy Krosby, chief investment strategist for The Hartford Financial Services Group Inc., the Connecticut-based insurance company.

“It was very similar to the Nasdaq in the winter of ‘99,” she said. “A lot of the money came in at the top of this peak.”

Mutual fund investors have held little back as they chased international growth. For the first four months of this year, world equity mutual funds had inflows of $79.70 billion, dwarfing U.S. domestic fund inflows of $39.89 billion, according to the Investment Company Institute, the mutual fund industry’s trade group.

Then, there were the hot emerging-market initial public offerings, such as last year’s Baidu.com Inc. IPO and Bank of China’s Hong Kong IPO, which raised $11.2 billion earlier this month, making it the world’s fourth-largest IPO ever.

Offerings by companies based outside the U.S. and Bermuda have dwarfed IPOs by companies based in the U.S. and Bermuda, which is a popular offshore registry for U.S. companies. International markets’ public offerings had a deal value of $663.92 billion for 2005 and the beginning of 2006. In contrast, U.S. and Bermuda companies’ offerings totaled $275.51 billion, according to Dealogic Analytics.

The flood of international IPOs versus those from the U.S. prompted Tobias Levkovich, Citigroup’s chief U.S. equities strategist, to wonder, in a recent note, “If 2000 was the peak of the U.S. technology bubble, could this … signal a comparable peak in non-U.S. markets?”

U.S. investors who buy on these markets’ dips may be trying to catch “falling knives,” Mr. Levkovich warned, saying the 1990s tech-market correction took longer than he expected “and we now wonder if a similar situation is developing in regions like Brazil, India, Turkey and Arabia, all of which have been battered this year.”

Charles Biderman, chief executive officer of TrimTabs Investment Research, estimates that U.S. investors, both individuals and hedge funds, have poured $500 billion into emerging markets since 2004. He blames that outflow for the near stasis in U.S. stocks.

“If the money stops going offshore and goes into U.S. stocks, this could be the hot market going forward,” Mr. Biderman said. “We hope. Fingers crossed.”

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