A year of 'frenzy' for emerging markets
Dec 24, 2009
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After a nasty slump in 2008, which broke a five-year winning streak, emerging markets roared back in 2009. The MSCI Emerging Markets Index jumped by almost 70% this year in dollar terms.
The MSCI Latin America Index almost doubled; Asia ex-Japan gained 63% and the index tracking the Middle East, Africa and emerging Europe gained 58%.
In dollar terms, all of the top five stockmarkets this year were developing-country indices. That capped a decade as world leaders, as Aline van Duyn pointed out in the FT. Ukraine's small stockmarket jumped by almost 900% measured in dollars, with Peru and Russia completing the top three.
Why emerging markets rocketed
This highlights the fact that emerging markets "have come of age", says Tim Price of PFP Wealth Management. Their fundamentals have greatly improved over the past few years and they boast better demographics and long-term growth prospects than the debt-soaked, credit-crunched West. That helps explain why investors have poured a record $75bn into emerging-market equity funds this year, according to EPFR Global.
A worldwide recovery in risk appetite, helped along by unprecedented doses of liquidity by the world's central banks, and the consequent rebound in commodities, also underpinned "a frenzy for all things emerging markets", says Steve Johnson in the FT.
Brazil and Indonesia on top
Peru, which finished third this year, neatly encapsulates these themes. It is the third-largest exporter of copper, zinc and tin, and last week Moody's upgraded its foreign debt to investment grade. Savings built up by strong commodity exports and reductions in government debt in recent years provided scope for increased government spending to counteract the global downturn and prevent a hard landing. The IMF expects growth to rebound to 5.8% next year.
Sound previous management also helped bolster the Brazilian economy, which remains "the bright spot" in the region, says Capital Economics. Domestic demand, the key driver of economic growth, has bounced back amid higher government spending; consumption and investment have recovered and the labour market has turned the corner, while banks look relatively heathy. The raw materials upswing has also proved a boon for the commodity-heavy stockmarket.
Solid domestic demand, along with mounting talk of its potential to become a new Bric economy, thanks to new-found political stability and falling debt levels, has spread enthusiasm about Indonesia. According to a report by Morgan Stanley last June, the economy could expand by 60% in five years. Meanwhile, Russia, represented in the top five by its two key indices, has benefited largely from higher oil prices.
Eastern Europe is still struggling
The bottom of the table highlights the impact of the regional fallout from the Dubai saga, while Kuwait has also been affected by political instability. In Nigeria, the bosses of eight banks have been sacked by the central bank governor after careless lending to speculators eroded their capital.
Slovakia's poor performance is a reminder that "it is far too soon to sound the all-clear" in eastern Europe, which, unlike other emerging regions, was heavily dependent on external debt, says Capital Economics. Dud loans have yet to peak, so the bank lending squeeze is set to continue, while the recovery in western Europe, the region's main export market, is likely to be slow. The region will "continue to lag behind". As for the asset class in general, the murky outlook for the global economy and commodities portends a "testing year" after 2009's easy ride, as EPFR Global puts it.
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