As proven time and time again in the world of investing, if you stick with a position long enough, you’ll eventually be proven right and usually, rewarded — although whether you’re rewarded soon enough to stay solvent is another question.
Such is the case with emerging markets — which appear to have zoomed back into favour.
As Bloomberg notes on Thursday, the MSCI Emerging Markets Index has rallied 39 per cent this year, outpacing a 7.3 per cent increase in the MSCI World Index. Right now, developing countries account for all 10 of the world’s best-performing markets.
We’ve all heard the emerging markets decoupling story before, as the FT’s John Authers noted the other day in his Short View column. But this time, he says, there’s a difference — “the markets really seem to believe it”.
But like almost any promising-looking investment, is the supposedly shiny, new EM era in danger of being over-hyped?
As the world’s number one EM booster, Mark Mobius of Templeton Emerging Markets Investment Trust reminds us in a column in Thursday’s FT:In the early days there was a buzz about EMs, but also scepticism and a lack of understanding (to a certain extent there still is). Then, there were many emerging countries but few open or large enough to invest in. There were strict foreign exchange controls and limitations on foreign investment, in addition to problems with safekeeping of securities and market liquidity.
Since then, he notes, there has been a big shift in attitudes towards EM investing, and the opening up of markets including Brazil, Russia, China and India. But the biggest success, says Mobius, has been the phenomenal growth in EMs in the past two decades:
Indeed, despite last year’s concerted sell-off, emerging markets have notched up a combined annual growth rate of 5.5 per cent over the past 20 years, well over double the 2.3 per cent growth seen in developed markets. And over the last decade (1998-2008), the market cap of EMs included in the S&P/IFC EM index rose from $300bn at the end of 1998 to $7,500bn by end-2008.
Mobius gets some reinforcement on Thursday from a Bloomberg interview with Morgan Stanley’s chief Asian and emerging markets strategist Jonathan Garner, who says emerging markets may offer the only “secular bull-market” among global stocks, led by economic and earnings growth in China.
Over the longer term, the rally in developing markets will be driven by signs of strengthening economic recovery and higher commodity prices, he notes, adding that Asia and other emerging markets increasingly are driving the global economy and their share of GDP has risen throughout the crisis:“The earnings recession that we’re getting in Asian emerging markets is far smaller than that of the developed world.” …” What happened was a sell-off last year that was way overdone,” Garner said. “A lot of the rally we’ve had this year is simply normalising back on those valuations to a more reasonable level.”
But it would seem it all boils down to whether you believe in both decoupling and the prospect of continued growth in China, India and other big EM economies.
Clearly, the resurgence of emerging markets is reigniting a belief in decoupling – the theory that these economies can continue to grow strongly despite a sharp slowdown in the developed world, noted the FT in a report last week.
One key to the continued rise of emerging markets lies in the now much-debated outlook for growth in China, India and Russia – and overall, the prospects for recovery and continued growth in key developed markets.
Jim O’Neill, chief economist at Goldman Sachs and another big EM – or rather, BRIC, booster – expects China and India to grow strongly this year in defiance of recession in most rich nations, the FT noted. This is due to a structural shift in the world economy that is seeing big emerging nations benefit from continued growth in domestic consumption:
“Contrary to widespread expectations, the chances of China showing growth of more than 8 per cent despite the world crisis are quite high, and the markets are signalling that India’s election results raise the possibility of more reforms there,” he said. “Over the next five years, there is a genuine chance that both China and India could show domestic demand growth of 10 per cent at the same time.”
But some analysts warn that the prospects for emerging markets rely more on the US consumer. As Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, told the FT:
“The emerging markets are a geared play on the developed world. If you look at the main emerging economies, it is only really China and India that are continuing to grow strongly.”
If you’re among those who believe China will lead the way into a golden era for EMs, however, even a glance at today’s top headlines on Bloomberg give an idea of the seesaw nature of EM markets in coming months:
China’s Exports Fall by Record After Global Demand Dries Up
Chinese Investment Surges, Countering Record Export Slump
As the FT reports on Thursday, the fall in Chinese exports and imports accelerated in May, dashing hopes that a collapse in the country’s external trade flows had bottomed out and pointing to the continued weakness in global demand.
In John Authers’ view, the market “really has faith in decoupling this time”. But, he asks, does it have too much faith?:
Disquieting signs, such as the failure of US financial stocks to make any gain since the stress test results came out a month ago, suggest all is not well. [Last Friday's] US payroll data could be a reality check. But the underlying trend is clear; rightly or wrongly the market believes that China and the other emerging markets will pull the world through.
Related links:
Garner says emerging stocks are ‘secular bull market’ - Bloomberg
Emerging markets outpace the west – FT