Emerging Markets: Has Their Time Finally Come?
With the world poised at critical crossroads – between recession and growth, war and peace, optimism and pessimism – now seems to be a timely moment to reconsider the case for emerging markets. In 2003, emerging equity markets actually held their value more successfully than developed markets, with declines of considerably smaller magnitude than those seen in the U.S., Europe and developed Asia.
The term «emerging markets» was coined by the World Bank’s International Finance Corporation in the early 1980s. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national product (GNP) per capita than developed countries. Of the 130 countries that the international financial community considers to be emerging countries, approximately 40 currently have stock markets. Emerging markets became the new frontier of global investing in the late 1980s and saw spectacular returns in the early 1990s, only to be followed by an exceptionally long span of disappointing returns. These markets seemed to lurch from one period of intense crisis to another with only intermittent spells of relief. The most intense storms during the 1990s were the Mexican peso devaluation of 1994 and its subsequent «tequila effect» contagion, the Asian financial crisis of 1997—1998, and the Russian ruble devaluation and debt default of 1998, which spread systemic risk into developed markets. Recently, the Argentine financial crisis has been in the spotlight.
During the longest U.S. bull market in history, emerging markets might better have been termed «submerging markets», declining 43% from 1994 to 2001, during a period when the S&P 500 index gained 130%. The disconnect between the potential of emerging markets and the actual returns of recent years has been extremely trying for investors, and many have decreased or eliminated their allocation to this asset class.
Despite the current sentiment, there is a strong case to be made that now is an ideal time for emerging markets investment. Like value investing renaissance in 2000 following the burst of the Internet bubble, market turning points are often uncomfortable, and even painful in the short term. It is important to remember that when the economic outlook and investor sentiment are at their worst, even a small turn of events toward the positive can be enough to re-ignite markets. Some observations suggest that emerging markets offer a compelling investment opportunity at present.