Submerging markets.

How you can play distressed markets overseas

In reviewing international investments in 1998, the term emerging markets seems like an oxymoron. First, there was the economic crisis that crippled much of Asia. Then, Brazil devalued the Real, its national currency. Emerging market funds--those that hold Asian, Latin American and Eastern European companies in their portfolios--lost a negative 26.85% last year, according to Lipper, Inc., the Summit, New Jersey-based mutual fund tracking service.

However, in the fourth quarter, foreign economies began to rally on the strength of interest rate cuts by the U.S. Federal Reserve and the strength of the Japanese Yen. As a result, a number of funds staged amazing comebacks. For example, $2.4 billion Templeton Developing Markets Trust, grew 24%. But it posted a total return of -18.7% for the year.

Investing in Pacific Rim or Latin America and other markets is probably not for you. But even the most sophisticated investor should be aware of the myriad risks, which include high volatility, currency fluctuations and social unrest.

Recovery in some markets may take months or years. For example, Merrill Lynch expects Asia to begin its recovery in the latter part of 1999.

So why invest now? Analysts believe that these economies have bottomed, and that you can realize meaty returns as offshore companies recover. "Valuations have reached such a low point, capital is flowing back into select markets," says Mark H. Madden, portfolio manager of Pioneer Emerging Markets Fund. "Multinational corporations are starting to acquire publicly traded Asian and Latin American companies. At current stock prices, it's now cheaper for multinationals to buy rather than build businesses. Investors stand to reap rewards as these markets head toward their next upcycle."

For example, investors have seen gains as Telefonica S.A. of Spain recently purchased a controlling interest in a subsidiary of the recently privatized Brazilian telecom Telebras and the Swiss cement company Holderbank, now controls Thailand-based Siam City Cement.

The best way to invest in these companies is through emerging market funds. Or you can buy shares of established American companies that have roughly 20% of their business in overseas markets. By doing so, you can reduce the volatility of your portfolio. If you play a sector, take a look at technology: many of such companies in, say, Japan have stabilized and have begun to rebound.

Funds Destined to Emerge

                                       Total Return
Fund                             4th Qtr.         1998     Assets(*)

S. Bernstein Emerging Markets        24.3        -21.1%      477
Templeton Dev. Markets I              24         -18.7      2,383
SSGA Emerging Markets                20.5        -15.9       261
Vanguard E.M. Stock Index            19.2        -18.1       612
Fidelity Emerging Markets            15.8        -26.6       289

                                                 Telephone
Fund                             Fees            Number

S. Bernstein Emerging Markets     2.0%           212-756-4097
Templeton Dev. Markets I         Varies          800-292-9293
SSGA Emerging Markets            No Load         800-647-7327
Vanguard E.M. Stock Index        No Load         800-662-7447
Fidelity Emerging Markets         4.6            800-544-8888

Source: Lipper Inc.

(*) In millions3