Investors get new choices in foreign securities

NEW YORK -- One day soon, emerging market funds may be stocking up on such exotic-sounding investments as Egyptian money market bills, Indonesian rupiah corporates and Hungarian forint treasury notes, say investors.

That's because many countries that never issued debt in their own currencies are doing so, while many that had done so are opening up to foreign investors. Hungary's treasury-bill market, for example, opened to outsiders last spring and Russia's this summer. Until recently many of the markets, such as Argentina's, didn't even exist.

"Local currency really is the wave of the future, as more and more countries finance their fiscal deficits and expenditure needs by borrowing in their own currencies," said Jeff Kaufman, manager of emerging markets with MFS Income & Opportunity's $4 billion global fixed-income funds.

For the issuers, selling debt in their own currency is preferable because it means they don't have to come up with dollars or another major currency to pay off bondholders.

And local-currency debt tends to draw better credit ratings, which can mean lower borrowing costs for the issuer.

For investors, the main lure is the potential for higher returns. Last week, for example, Argentina sold short-term dollar-denominated treasury bills to yield 6.71 percent and comparable peso debt to yield 8.69 percent.

The country's currency is tied to the dollar and inflation is expected to run at about a 1.5 percent rate this year.

What's more, Latin American governments, traditionally the biggest debtors, are paying down some of their dollar liabilities, forcing investors to look for other alternatives. This year, Mexico, Brazil and Argentina have considered retiring some of the Brady bonds they issued as part of debt restructuring programs over the past five years.

"There aren't many Brady plans to be done again," said Kaufman, after Peru wraps its old loans into Brady bonds later this year.

Of course, the risks are substantial. In addition to the danger of default, foreign investors who buy debt denominated in local currencies could see their returns chewed up if the currency is devalued. While Latin American dollar-denominated bonds were hit hard by the Mexican financial crisis last year, local currency debt plunged even more.

Nonetheless, a growing cadre of investors is attracted to such debt. Scudder, Stevens & Clark and Fidelity Institutional Investment Service are bullish, and some smaller funds dedicated solely to investing in the market have been created by Smith Barney Inc., Washington Asset Management and others.

Kaufman at MFS says he's raised his investment in local-currency debt in recent months, while reducing his holdings of Brady bonds, on a relative basis.

The Emerging Market Traders Association's most recent annual survey found its members traded $575 billion of local currency- denominated debt last year -- 10 percent more than in 1994. That accounted for 21 percent of all trading, up from 19 percent the year before.

This month, the International Finance Corp., the private arm of the World Bank, started work on a new index series, said the project's manager Mari Ishii.

Next summer, it will provide a benchmark for local currency, emerging market corporate debt in South Korea, China, Thailand, Indonesia, Malaysia and the Philippines.

Another index series, J.P. Morgan's Emerging Local Markets Index, debuted last month. It includes treasury bills sold by 10 countries, spread across five continents. That gives money managers "a more credible benchmark to evaluate how well you're managing," said Kaufman of MFS.

Edward Bartholomew of J.P. Morgan's index group said he began work on the index only after noticing U.S. investors "running real dedicated money, not just dabbling in local currency positions."

Rating companies, too, including Standard & Poor's Corp, are opening up shop in developing markets to rate some of the new debt, starting with Latin America and expanding into Asia and the Middle East. Most local issues garner higher ratings than bonds denominated in dollars because they're much easier for borrowers to pay. Dollar bonds can become an unsupportable burden in the event of a currency devaluation.

One bond sale can be enough to entice investors and get a market underway, said Elizabeth Morrissey, managing partner at Kleiman International, a research firm that publishes an annual guide to exotic debt.

"Several months ago no one glanced at the Philippines. Then they had a very successful local issue, which will probably be the first of many," said Morrissey.

Emerging Asia also needs the money, after long subsidizing the export industries that have driven explosive economic growth, according to Joyce Cornell, a money manager at Scudder.

"As that model frays, Asian governments will have to borrow to fund local industries and current account deficits," Cornell said.

From an investor perspective, the niche offers numerous benefits. Treasury bills, whether South African, Turkish or Russian, are often just one-, three- or six-months long, a boon at a time investors are concerned the Federal Reserve could lift rates and erode the value of longer-dated bonds.

Also, since the economies of Lithuania, Malaysia and Venezuela, for example, have very little in common, local debt as a whole exhibits little overall volatility, as one market's movements cancel out another's.

Price swings can be a real worry for mutual fund managers, whose performance is ranked for volatility by Morningstar Mutual Funds, said Robert Kowit, fixed-income portfolio manager at Federated Global Research in New York.

Some firms are edging into local debt as their European bond sales departments cast an eye to the east.

"Lots of currency guys are wondering what they'll be doing after European monetary union," said Brian Zipp, managing director of emerging markets at Lehman Brothers Inc., who's hiring staff to trade local currency debt and derivatives from Brazil, Russia, Argentina, Turkey, Poland and the Czech Republic.

"You'll probably be trading only one or two currencies if you're not in emerging markets," Zipp said.

Copyright 1996
Provided by ProQuest Information and Learning Company. All rights Reserved.