Thursday, April 13, 2006 | 7:11 a.m.
The emerging markets look like they're getting close to the scalding point.
You can tell by the bubbles - the torrid price action in single-country mutual funds from India to Brazil, the hot money going into almost any stock fund with "international" in its name.
The markets staged an impromptu little sell-off a few days ago, as if to provide a preview of how events might unfold if they ever boiled over.
Is this column predicting an imminent disaster? It most certainly is not. I'm a total believer in the long-term bullish argument surrounding stock markets in newly awakened economies around the world.
Then again, I also put a lot of credence in the 1990s story of the Internet miracle remaking the world economy. Still do, as a matter of fact, even after the bear market that drove the Nasdaq Composite Index down by more than 75 percent from early 2000 through late 2002.
There's no predicting whether or when any comedown of that sort awaits investors on the global frontier now. But everybody who ventures into these international waters should be conscious of rising risk.
The tech wreck attested that no economic development, even one as potent as the productivity machine created by late-20th Century advances in computer technology, makes stocks safe to buy at any price.
Today the center of the action has shifted from Silicon Valley in California to the up-and-coming economies of Asia, Eastern Europe and Latin America. The new boom, of course, is no exact replica of the last one.
The two do present some striking parallels. Start by looking at a recent Bloomberg screen of the 15 top performers over the last three years among more than 8,000 U.S.-based mutual funds.
As of the end of last week, all 15 were stock funds invested in single countries and regions of the developing world - Turkey, Brazil, India, Russia, Indonesia, plus a smattering of Eastern Europe and Latin American funds.
Some of these are conventional open-ended mutuals, others are closed-end or exchange-traded funds with fixed numbers of shares that trade throughout the day. Since mid-March 2003 these 15 funds have posted annualized gains ranging from 62 percent to 82 percent.
Over the same period, according to Bloomberg data, more than 80 broadly diversified emerging-markets stock funds have averaged a 44 percent per-year gain. Almost 300 stock funds classified as "international," which is presumed to mean they concentrate on stocks in developed markets such as Europe and Japan, have averaged a 31 percent annual gain.
"The performance has been exceptional over the past three years," say the managers of the $16.3 billion Dodge & Cox International Stock Fund, whose assets have almost quadrupled since the end of 2004. "We do not think this level of returns is sustainable and encourage shareholders to have more conservative expectations of future returns."
If some of the recent emerging-markets numbers strike you as faintly familiar, they look quite similar to certain stats from the late 1990s. In the three years from the end of February 1997 through February 2000, according to my Bloomberg, the Munder Internet Fund soared at a 112 percent annual rate.
The slightly less specialized Firsthand Technology Value Fund gained 80 percent a year, and the Nasdaq Composite Index, representing the broader market where many up-and-coming stocks trade, rose at a 54 percent annual clip.
During the next three years, the Munder Internet Fund plunged 53 percent a year, the Firsthand Technology Value Fund 48 percent a year, and the Nasdaq Composite 34 percent.
Let me repeat, I wouldn't dream of claiming that the emerging markets now are in precisely the same position the tech stocks occupied at the turn of the millennium.
If I were a betting man, and as it happens I am, I'll stick with my personal bets on a dazzling future for the world economy in general and emerging markets in particular. I have no plans to sell any of my shares in an emerging-market fund, whether Japanese and American central bankers raise interest rates or not.
Still, the specter of higher interest rates was enough to send a shiver through the emerging markets for a little while early this month. The Ishares Emerging Markets Index Fund, an exchange-traded fund based on a Morgan Stanley Capital International index of those markets, tumbled almost 7 percent from March 2 through March 9.
That puts every emerging-markets investor on notice. The opportunities are real and prodigious; the risk is real too, and has grown bigger as the stocks have climbed.
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