Excellent WSJ article. Emerging-Markets Expert Gropes For Sales Pitch Amid Wreckage
[This is what we're up against. Doesn't it have all the signs of a bottom? It will turnaround at some point...]
September 2, 1998
By PAMELA DRUCKERMAN and JONATHAN FRIEDLAND
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- Robert J. Pelosky once persuaded monks at a Sinai
Desert monastery to break their ban on outsiders and let him spend the
week there. But the emerging-markets strategist at Morgan Stanley Dean
Witter Inc. is finding it a lot tougher to persuade clients to plunge back into
developing-country stocks.
The 39-year-old former defensive tackle was working the phones early
one recent morning, trying to persuade skeptical money managers that
Brazilian stocks could rally on the successful privatization of state phone
company Telebras. With Latin American stocks at their biggest discount to
the U.S. in a decade, the Telebras sale could be just the spark needed for
a price recovery, Mr. Pelosky tells a London fund manager.
But Carrie Schloss, who manages $175 million for
Commercial Union Investment Management, isn't
biting. "It's all well and good to talk about the
value in the market, but there are a lot of things
that were cheap three months ago and they're even
cheaper now," she says later.
Faced with a global meltdown in
developing-country stock markets that has been
made even worse by the recent U.S. stock plunge,
Mr. Pelosky and other emerging-market gurus are
groping for a pitch that works. For the first time
since the term "emerging markets" was invented a
decade ago, the news is bad from Malaysia to Mexico, and many of the
theories they have carefully nurtured to sell stocks are falling on deaf ears.
Theory Hasn't Panned Out
Chief among them: The notion that investors, by accepting the higher risk
of investing in emerging markets, are likely to get higher returns. Except for
the most astute market timers, emerging-market stocks haven't panned
out: $100 held in the average emerging-market equity mutual fund for the
past five years would be worth about $65 today, according to the most
recent data from Lipper Analytical Services Inc. The same amount
invested in less-risky U.S. markets during the same period would be worth
about $231, measured by the Standard & Poor's 500 index.
That's tough to digest for Mr. Pelosky, who has spent his entire career
either trading or selling emerging-market stocks. Since 1990, when Mr.
Pelosky joined the firm, resources devoted to emerging markets have
soared. His equity-research team, alone, now has about 90 full-time
staffers, up from about 20 five years ago. Dozens more at Morgan Stanley
are chasing corporate finance deals in remote outposts around the globe.
Glimmers of Good News
Tuesday, in the midst of nonstop conference calls with clients, Mr. Pelosky
was still finding glimmers of good news in the rubble. "We are 80%
through the global deleveraging process" he says he told clients, adding
that he sees value in Latin America and Eastern Europe. "You have to
look for where financial markets and fundamentals have disconnected the
most."
In November 1997, Mr. Pelosky was promoted from Latin America
strategist and research director to become the firm's first global
emerging-markets strategist. He is now responsible for managing -- and
justifying -- Morgan Stanley's global emerging-markets model portfolio,
which suggests how much investors should allocate to each country. His
reports look broadly at investment trends and market developments
across regions, comparing the performance of, say, Polish and Chilean
stocks.
But Mr. Pelosky, whom colleagues describe as a consummate salesman
equally adept at marketing stocks and his own image, finds himself in an
odd spot. Business at Wall Street's emerging-markets units has fallen off a
cliff. Global funds, whose huge bets on Third World stocks once kept
trading desks humming, have pulled out en masse. Emerging-market funds,
which have no choice but to stay put, are opting for cash to meet a steady
tattoo of redemption calls. And with interest dimmed across the board,
there is little opportunity for the banks to underwrite stocks and bonds.
Several brokerage houses that specialized in emerging markets, including
Caspian Securities Inc., already have cut back or closed up shop.
To be sure, emerging markets account for just a small fraction of Morgan
Stanley's total revenue. Though the firm doesn't break out earnings for
emerging markets, an analyst who follows the company says even in a
good year, the asset class probably accounts for less than 10% of total
revenue, dwarfed by the firm's retail and U.S. investment-banking
businesses. A Morgan Stanley spokesman wouldn't comment on the firm's
revenue from emerging markets.
'Bump in the Road'
Mayree Clark, Morgan Stanley's global director of research, says the firm
remains committed to the business and to Mr. Pelosky. "He will be with us
well into the next century and there will continue to be great opportunities
to commit capital," she says. "What is going on right now is a bump in the
road" in the world-wide transition toward market economies.
Mr. Pelosky acknowledges that investor sentiment is the lowest he has
seen and that battered markets will be slow to revive. But he also has
consistently advised that a little patience and a bigger cash commitment will
pay off big, as global managers come to see how cheap
emerging-markets" stocks are relative to developed markets.
Some of his calls have been prescient in recent months. He advised
investors to lighten up on Russian stocks in late June, just before that
market went into a free fall. After a whirlwind tour of Asia last summer, he
suggested that investors strongly lighten up on, or eliminate, Indonesian,
South Korean and other Asian stocks that subsequently tanked. But he
didn't recommend abandoning those markets altogether, and the bets
Morgan Stanley made in the model portfolio run by Mr. Pelosky haven't
generally paid off.
Blindsided in Latin America
Meanwhile, he concedes he was blindsided in Latin America. He has
recommended heavy positions in Mexico and Brazil all year, insisting that
both markets would resist Asia's problems and that investors eventually
would appreciate their fundamental strengths. Not so. The Mexican and
Brazilian benchmark stock indexes are down sharply, in dollar terms, for
the year.
With so many crises happening simultaneously, the strategist concedes it's
tough enough to figure out what's going on -- let alone predict what's likely
to happen next. He receives a hundred or so e-mail messages a day from
Morgan Stanley analysts reporting on world-wide market developments,
and constantly tracks global stock, bond and currency moves by
monitoring screens on his desk.
Rebounds Are Seen
Still, Mr. Pelosky remains steadfast that some markets will bounce back --
a message he repeats frequently in research reports and television news
shows. "It isn't a question of if," he says. "It is a question of when."
That pitch rings hollow for some Morgan Stanley clients such as Brian
Barish, an international fund manager at Denver-based Cambiar Investors
Inc. He has slashed emerging-market stocks to just 6% of his portfolio,
from about 20% in January, taking with it some of the trading fees he used
to pay Morgan Stanley. With global markets in free fall, Mr. Barish says
his reaction to a recent upbeat fax from Mr. Pelosky was "to kind of
glance at it and throw it in the garbage."
Says Mr. Barish: "You actually need some tangible evidence that things are
going to turn out beautifully."
Mr. Pelosky has ready retorts for the pessimistic. "Would you rather buy
something that's up 100% or buy something that's been flat?" he says,
sitting in his pin-neat office, filled with tombstones attesting to the firm's
many emerging-markets deals and photos of praying Thai monks and
Chinese peasants on the Silk Road. "You can also say that if you were
successful in Russia you made 450% between 1995 and 1997 -- of
course, you lost a lot of that if you overstayed your welcome."
Still, Mr. Pelosky concedes that even inside Morgan Stanley he is chided
by people who say it will be five to 10 years before emerging-market
stocks take off again. In a fax to investors in mid-August titled "Heretical
Thoughts," it was clear that even Mr. Pelosky's mood occasionally
darkens. "Weeks like the one just past," he wrote, "lead you to think
differently about the world and how it is ordered."
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