In many respects 1994 was quite a discouraging year for the emerging markets trading industry, and thus far 1995 has been a difficult one.

A number of countries, including Mexico, Venezuela, Russia, and Nigeria, encountered political or economic problems in 1994, which after several years of steady growth in price and confidence levels significantly changed foreign investors' perceptions of the wisdom of investing in the emerging markets.

Prices for most debt assets fell sharply, reacting mainly to rising interest rates in the first half of 1994 and Mexico's devaluation in December. Both events demonstrated a stubborn linkage that seems to exist across the different markets and assets.

Too easily forgotten, however, are several of 1994's bright spots.

Brady transactions were successfully completed for Poland, Bulgaria, the Dominican Republic, and most important, Brazil. In addition, there was substantial progress in the Russian debt talks, with a good foundation set for future progress.

Despite the price declines, the volume of debt trading grew substantially, showing increasing geographic and product diversification. Trading in Russian loans alone increased in 1994 to a level that approximates the size of the entire loan trading market less than a decade ago. A large backlog in unsettled loan trades was successfully reduced.

As you are aware, trading got off to a rocky start in early 1995, as the market's reaction to Mexico's devaluation, in the wake of the prior year's difficulties, created a liquidity crisis, with ripple effects that threatened to spread throughout the emerging markets.

Price levels for most assets continued to drop sharply through February, before recovering substantially in March and April. All trading houses, whether or not they have incurred significant losses, have been forced to reevaluate their overall business strategies, and many investors have retreated from the emerging markets. In recent weeks the markets have advanced cautiously, as if waiting for other shoes to drop.

There are some expectations in the trading community, however, that the Brady rescheduling process will be substantially completed in 1995, with successful Panama and Peru transactions joining Ecuador's, and that more progress will be made in the Russian debt negotiations. And, of course, the trading community is encouraged by the Zadillo administration's current efforts and hopes that Mexico rebounds quickly.

I generally believe that reality is rarely what it appears to be. Things are not usually as good as they seem, nor as bad. Price declines have now created buying opportunities in many emerging-market debt instruments, and certain of the recent market difficulties will, in fact, create a favorable climate to take advantage of these opportunities over the medium to long term.

There are reasons to think that a basis now exists for sustained growth in emerging market investments.

First, banks and other investors have been shown why they should be cautious in their approach to the emerging markets. Their confidence in making new investments may not return quickly, but over the course of the year one can probably expect to see case-by-case analysis of country and company fundamentals replacing the somewhat herdlike enthusiasm that characterized much of 1992 and 1993.

A greater emphasis on case-by-case fundamental analysis should reduce the likelihood that political and economic problems that inevitably arise from time to time in one or more countries will create a ripple of investor disaffection throughout the emerging markets.

Investors should realize that taking a global view does not necessarily mean lumping all of the emerging markets together. The markets are remarkably diverse. Current political or economic uncertainties in some countries must be viewed in the context of the great progress that has been made in the past decade. Market participants must be realistic in their appraisal of the many trading and investment opportunities and in their expectations for continued economic and political reform.

Second, countries and some companies have been shown how sensitive foreign investors can be to political events and economic policies. This awareness may tend to lessen the dependence of some countries on short-term foreign capital and to encourage them and others to firmly stay the course in the pursuit of market-oriented political and economic policies.

This greater market discipline should be reinforced by the likelihood that countries in the emerging markets will be encouraged to provide better and more timely information about their economic performance.

Third, the major creditor countries and international financial institutions have been shown the need to strengthen mechanisms that encourage strong economic performance in the emerging markets while at the same time catalyzing private-sector flows and marshaling timely support to countries that need and deserve it.

Market makers in the emerging markets debt trading industry should react to the events in the recent past by striving to make their marketplace even more efficient and transparent for their own benefit, for the benefit of their customers, and to strengthen their own risk management systems.

My group's board of directors has reviewed current market conditions and determined that this is no time to cut back our efforts to increase market efficiency and transparency and to reduce settlement and other trading risks.

Finally, originating houses will be required to exercise greater creativity in structuring financings that respond to the appetites of a more cautious community. While I share the views of those who expect a sharp decline in the private capital flows to the emerging markets in 1995, current market conditions and the continued need for capital should lead to more structured financing involving asset-backed deals, project finance, and export-related structures or venture capital transactions.

I do not believe that the emerging markets have been set back five years, as some have suggested. I would expect, however, that 1995 will prove to be a difficult year in many emerging markets, but not a disappointing one for the patient investor or trader who does his or her homework based on the fundamentals.

Ripple effects will be less pronounced going forward, and solid fundamental analysis is more likely to be rewarded. Investment information should be better this year, and trading systems and practices can be expected to improve market efficiency.

Trading activity, particularly in more liquid instruments such as Brady bonds and in loans of the rescheduling countries, is likely to remain at high levels.

As if they needed reminding, countries and investors alike are clearly now on notice that to get the benefits of foreign investment, they must use care and have realistic expectations.

Mr. Chamberlin is the executive director of the Emerging Markets Traders Association, New York. This article is excerpted from an April 26 speech to the Institute for International Finance in Washington.

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