Juicy pickings if you can get it right

It has been the kind of investment trip to which the old cliche "roller-coaster ride" hardly begins to do justice. In any developed market it would have taken a catastrophic economic collapse followed by near complete recovery to have produced a similar effect. It was, in short, a normal phase in the notoriously volatile world of emerging markets.

It began late last year when the economic and currency crisis in Mexico sent its stock market into a tailspin. Between December and March it lost two-thirds of its value. The panic spread to the other Latin American and unrelated markets in the Far East and elsewhere. Turkey, for example, had also fallen by two-thirds come April.

Then investors realised that Mexico and the other emerging markets were not going to vanish in a puff of smoke and confidence returned. In the past few weeks, Mexico has risen 30-40 per cent from its low point, while Turkey - the world's best-performing stock market this year - has doubled since last month.

What is more, the prospects for further increases look extremely good. Now that emerging markets have the bit between their teeth again, there is every reason to suppose they will head back at least to their previous levels, as Turkey has already done. "I expect that by the end of this year Mexico will have doubled from it lowest point," said Ken King, head of emerging markets at Kleinwort Benson.

This suggests there are juicy pickings to be had for the bolder private investor. But how do you get a slice of the action?

The only practical way is to put your money in an emerging markets unit or investment trust. This gives a spread of investments, thus limiting the risk to some degree, as well as management by people who know the markets from personal experience.

There is, inevitably, a fair range of choice, which gives investors flexibility in deciding their own strategy. You may feel, for example, that since Latin America fell hardest it will recover most spectacularly. In which case it is worth going for one of the regional funds specialising in Latin America, such as Templeton Latin America. The risk is undoubtedly greater but the returns may be higher.

A more cautious approach would be to go for one of the global emerging market funds that spread their risk by covering the Far East, Eastern Europe and South-east Asia as well as Latin America.

Another factor to watch, although it may not be so easy to determine, is a fund's investment strategy. In some funds there is a natural tendency to remain in rapidly rising markets until they hit the top. A fund like Kleinwort Emerging Markets, however, takes a more sophisticated view of the volatility of these markets. It allows a maximum limit of 10 per cent of the fund to be invested in any one market. If the market rises by more than 50 per cent within a 12-month period, however, it must reduce its holding to 7.5 per cent. It starts to sell out rather than hold on.

The reason is that the higher a market rises, the greater the risk that it is reaching its peak. It is, Kleinwort believes, wiser to get out while still ahead and reinvest in cheaper markets. Besides, if you wait until an emerging market hits the top or the bottom it is always harder to bail out or buy in because market liquidity tends to dry up very rapidly. Better instead to catch the market on the rise or fall. That often means anticipating the next change of direction early.

"There were times when we felt like the only buyers of Mexico when the market was falling last December," Mr King admitted. "It felt very lonely out there."

The usual advice to emerging markets investors is to go in for the long term so that the ups and downs balance eachother out. "I wouldn't urge people to invest for the short term," says Austin Forey of Robert Fleming's Emerging Markets Fund.

Strikingly, the recent crisis seems to show that investors have taken this advice very much to heart. In developed markets, the usual pattern is for investors to pile out of investment and unit trusts when there is a big price fall. But to the amazement of almost every fund manager in the business, emerging markets investors kept their nerve as markets plunged. There was no wholesale flight from the funds.

This admirable stoicism means that for new investors it is not as cheap to buy into some funds now as you might have expected. If investors had panicked, investment trust shares would have dropped to a significant discount to net asset value, making them a very attractive buy now. In fact, however, the discounts that did emerge were only wafer-thin, so investment trust shares cannot be picked up at bargain basement prices.

Nevertheless, emerging markets still look a good bet. And since they are rising so strongly there must be a strong argument for a short-term punt. Investors going into a market like Mexico for the next six months or so could garner a futher 60 per cent rise in share prices. It would, of course, be a fairly high-risk strategy since Mexico's economy still faces considerable problems, but the potential rewards are clearly very tempting.

Latin American Top 10

Best performing Latin American investment and unit trusts

pounds 100 invested from 1/12/94 to 15/05/95

Fund pounds

1 Templeton Latin America 81.28

2 Abtrust Latin America 79.76

3 Scudder Latin America 73.02

4 Latin American 69.04

5 S&P Latin America* 68.89

6 Abtrust Latin American* 66.89

7 Morgan Grenfell Latin American 65.66

8 Edinburgh Inca 65.31

9 Perpetual Latin American Growth* 63.96

10 Old Mutual Latin American Cos.* 60.42

* Unit trusts.

Source: Micropal