Left for dead by many investors at summer's end, emerging markets from Brazil to Thailand showed signs of life in October and November.
The Morgan Stanley Capital International Emerging Markets Free index bounced almost 10% in October and continued to rise into November.
Brazil's Bovespa rallied 34% in the period, and the Stock Exchange of Thailand on Nov. 6 reached 80% above its low at the start of September.
But the gains were not enough to wipe out a disastrous year. The MSCI index was down close to 29% for the year through Nov. 10.
Still, the recent rallies -- and their underlying causes -- gave some emerging markets analysts and investors a sense of cautious hope markets could strengthen further.
When speaking about the depressed asset class, investors warn that each of the more than two dozen countries that make up emerging markets indexes is unique, with different economic and political problems and characteristics.
They point, however, to similarities that led to the summer's contagion and the current small recovery.
Investors agreed two interest rate cuts by the Federal Reserve Board -- one in late September and the second in October -- eased pressure on international markets. The U.S. Congress' $18.9 billion commitment to the International Monetary Fund in the federal budget, which led to a $90 billion addition by the other G7 countries, also assuaged global investors' fears. Also helping were last week's expected $42 billion aid package to Brazil and the yen's rise vs. the U.S. dollar, money managers said.
But investors disagreed whether the bounce will continue or fall flat -- the classic "dead cat bounce."
"The cat's still alive," said Julian Thompson, investment manager with Babson-Stewart Ivory International in Edinburgh. Favoring the rally is that investors are lessening their cash positions and buying into markets, he said. Mr. Thompson, whose emerging markets portfolio totals $450 million, said he recently bought into China and Brazil.
Echoing the sentiment of many money managers, he added he is buying companies with "net cash positions."
Some, however, are not convinced the bounce will survive.
"Until you have seen signs of genuine recovery, it's not worth investing" in many of the markets, said Nandu Narayanan, a portfolio manager with Trident Investment Management Co., New York.
Mr. Narayanan has not unwound the 45% cash position in his global emerging markets mutual fund. The fund is between $300 million and $350 million. As a country-oriented investor, he said, "We're seeing top-down investing as treacherous."
"The rally currently ongoing in Asia is more sustainable than the one the region had in the first part of the year," said Jay Pelosky, global emerging markets strategist for Morgan Stanley Dean Witter in New York. But "a lot of work still needs to be done. There's a slowing global economy. It's difficult to have a recovery with export-driven economies."
Mr. Pelosky said he recommended buying selected equities over the next 12 months, and that Singapore and Hong Kong, respectively, were the "most fundamentally sound economies." But "crisis economies" such as South Korea and Thailand, which make up, respectively, 6.6% and 2.4% of the MSCI benchmark, still have far to go, he said.
South Korea still must restructure many of its big conglomerates, he said. And Thailand's banking system is a mess, as both good and bad loans go uncollected.
"There's legislation currently in (Thailand's) Parliament that needs to be passed," he said. "It's bankruptcy and foreclosure legislation that would help people collect on the collateral owed."
Thai banks, investors say, are often powerless to collect loans, even when borrowers can pay. "There's some moral hazard issues in all these countries," Mr. Pelosky said.
Asia's recovery isn't the only one drawing skeptical investor response. Brazil's plan to increase taxes and cut spending could help the economy, said Steven Schoenfeld, head of international equity strategies for Barclays Global Investors in San Francisco. But Brazil's government has to make changes that are politically hazardous, he said.
There are some signs of hope in the region, Mr. Pelosky said.
"In Latin America, the company fundamentals are in better shape than in Asia. The problem is that economies there are in worse shape," he said.
Brazil is heading to recession and Mexico's growth will slow, he said. Mr. Pelosky is cautious on Brazil but thinks Mexico looks better, although its market is trading at 17 times 1999 projected earnings.
Even the most cautious, however, see opportunities in the emerging markets.
"We would rather buy assets than stocks," said Mr. Narayanan, who also is a portfolio manager with BEA Associates in New York. "You can buy true assets like factories or resorts for 10 cents on the dollar. If you're buying equities, you're buying hope."