No wonder the MSCI Emerging Markets index has more than trebled since mid-2003. The “basket-case statistics” that used to characterise developing markets, such as runaway inflation and dependence on foreign capital, are now largely “economic history”, says Tom Stevenson in The Daily Telegraph. Brazil, for instance, has managed to reduce inflation from 4,900% in 1994 to single digits, with interest rates falling in tandem, while countries have also slashed debt. Corporate governance has also improved.
Increasing inter- and intra-regional trade, along with ever-more-wealthy consumers, is reducing reliance on the West. Merrill Lynch expects emerging markets to account for 77% of global growth in 2007 as they begin to drive the world economy, says Slim Feriani of Progressive Developing Markets. The markets’ p/e is up sharply, but still looks reasonable at 14, with earnings growth of 17.3% expected. “The bull market is far from over.”
But while the long-term outlook remains compelling, what of the near-term? Abundant global liquidity, low interest rates, strong investor risk appetite and low volatility have all benefited riskier assets, such as emerging markets. However, conditions are changing, says Michael Sesit on Bloomberg.com.
Long and short-term rates are rising and a more restrictive credit cycle is “a red flag for emerging markets”, says Joseph Quinlan of Bank of America Capital Management. And concerns over the end of the credit boom are hardly good news for global equities. With many emerging markets looking fully valued, Andrew Howell of Citigroup reckons they are vulnerable to “a serious… setback”. Investment legend Jim Rogers says he has sold out of all emerging markets except China, as he thinks they’re “over-exploited” – but come the next big correction “I hope I’m smart enough to buy some of them back”.