Monday November 29, 4:48 pm Eastern Time

Investors bet on emerging markets rally after Y2K

By Apu Sikri

NEW YORK, Nov 29 (Reuters) - Fund managers are shaking off concerns about Y2K computer problems and plowing money into emerging markets, where many expect a powerful rally next year, investors and analysts said.

Worries that computer problems related to the switch over to the year 2000 would disrupt economies in developing countries caused a sharp slide in emerging market assets late this summer.

The MSCI Emerging Markets Free Index dropped 10 percent in the period from July 9 to October 19, primarily on Y2K concerns, after having rallied 44 percent in the first six months of the year.

But since then, portfolio managers and analysts have scrutinized the policies and methods that companies in Latin America, Asia and other parts of the world have adopted, and found little cause to worry.

In the last six weeks, the MSCI Free Index has bounced back 12 percent.

Ian Laming, strategist at Morgan Stanley Dean Witter, said that in a survey of 100 companies in Latin America conducted by the investment bank, more than 95 reported they were fully prepared for the transition to 2000.

``We do expect some dislocation in the first few weeks of 2000 but nothing profound,'' Laming said. ``There was a severe contraction of liquidity and a very high risk aversion to emerging markets earlier in the year, but we've since then discounted it and moved on.''

Money managers said they were not disregarding potential Y2K problems, which stem from old software in which computers recognize only the last two digits of a year, and could confuse the year 2000 with 1900. In fact, as December gets closer, they are paying closer attention to the potential for such problems, but they are finding little to worry about.

``I've been trying to stay invested in companies that are large cap and that are stating they are Y2K-compliant,'' said Daniel Beneat, who manages emerging market assets at Dreyfus Corp. Large cap refers to companies that have a large market capitalization.

Beneat said his cutoff date is December 15. If a company cannot certify by then that it is Y2K-compliant, he will sell the stock. At the same time, he is staying invested. ``There is a lot of liquidity and the markets could rally a lot further in January,'' he said.

``The larger companies in emerging markets are better prepared,'' said Rajiv Jain, portfolio manager at Vontobel USA.

Vontobel picks companies that are cutting edge in their business and have exceptionally good management. Such companies tend to be forward-looking and are for the most part ready for the transition to 2000.

Analysts said any concerns over computer-related problems have now been relegated to the company-specific level. ``From a macro perspective, it is likely to be a non-issue in the sovereign debt market,'' said Michael Gavin, economist at Warburg Dillon Read.

Emerging market bonds have already gained 21 percent in the last five months as reflected in the J.P. Morgan Emerging Markets Bond Index.

``Investors in emerging markets realize they can't afford to wait, otherwise they'll miss the rally. Naturally, this brings things forwards,'' said Gavin, adding that investors have been buyers of debt in anticipation of surging prices next year.

Many companies in emerging markets have gone beyond mere computer system upgrades and have ``used Y2K as an opportunity to gut their software and hardware to put in place state-of-the-art systems,'' said Morgan Stanley's Laming.

-- Say Yes (eggman@GoGoGo.com), November 29, 1999

Answers

Good move (NOT)...go into debt now to purchase stocks in "emerging market corporations." That could leave you in an interesting position come about February...

-- Mad Monk (madmonk@hawaiian.net), November 29, 1999.

What do you mean the bridge is out? This is a wonderful day for a drive. Keep driving!

-- cody (cody@y2ksurvive.com), November 30, 1999.

These are the people that are managing your pension funds.

-- midas (midas_mulligan_2000@yahoo.com), November 30, 1999.