Boom or bust – it’s a phrase often associated with emerging markets
The mid-1990s brought rallies to markets in Latin America and Southeast Asia, where the so-called Tiger economies led the way.
Then came the collapse of the Thai baht in 1996, which unleashed a chain reaction in global markets, cleverly subbed “Asian contagion”, which erased billions of dollars in stock market capitalizations.
The new millennium has been good to many emerging markets. A long-stretch stretch of historically low interest rates in the U.S., followed by a global commodities boom (oil, metals, minerals) lifted markets from South Africa to Russia to Brazil. Russia and Venezuela, both oil producers, are among the top ten best performers over the past five years. Mexico ranked No. 12 with a 31% gain. (See list below.)
Overall in 2006, the MSCI Europe, Australasia, and Far East (EAFE) Index, the leading international equity benchmark, was up 23.5% in dollar terms and 13.8% on a local currency basis.
Reiner Triltsch, head of international trading at U.S. Trust, describes himself as neutral on emerging markets at this time but adds that the "valuations are pretty rich," when "there should be some sort of discount."
"We might consider the possibility of a correction that might be heftier than we all would like," said Triltsch, acknowledging the rally of recent years as well as the historical volatility.
Continued globalization has brought increased foreign direct investment, created well-paying jobs and expanded the middle-class income group in many nations such as India. In countries like China and Vietnam, a new class of consumers is emerging. In Europe, the expansion of the European Union and its single currency system has lifted personal incomes and drawn investment to a host of nations, including Croatia and the Baltic states.
In addition, a wealth of investment money, including hedge funds and private equity groups, is looking for a home and finding it in less developed countries.
Some high-flying markets – especially those sensitive to the value of the dollar -- took a hit as the U.S. Federal Reserve relentlessly raised interest rates from 2004-2006. The peak of the commodities boom in 2006 also caused some capital flight. That triggered alarm bells and the usual warnings about the rise and fall of emerging markets. But the Fed’s decision to stop raising interest rates brought a second – some say, third, wind – to the rally.
Alec Young, global equity market strategist for S&P Equity Research, said he doesn't expect the heady returns seen in the past few years but valuations still look pretty attractive for emerging markets.
"I think we're going to continue to see good returns; the story is very much intact," said Young, in an interview with CNBC.com. "We're looking for moderation with 2007 returns of 10%, which is significantly less than last year but a 10% return is nothing to sneeze at."
The International Monetary Fund’s World Economic Outlook for 2007 calls for global economic growth of 4.9% -- slightly below the 5.1% pace of 2006 but still high by historical standards -- with continued strength in emerging markets.
Here’s a look at some of the best performing emerging markets in 2006 in dollar terms, according to MSCI Barra. Performance data for emerging markets vary somewhat because there's often no established benchmark index such as a Dow 30 or S&P 500.
1. Venezuela-- 110%
2. China -- 79%
3. Argentina -- 68%
4. Indonesia -- 55%
5. Russia -- 52%
6. Sri Lanka -- 50%
7. Morocco -- 48%
8. Peru -- 48%
9. India -- 46%
10. Philippines -- 44%
Some of the the recent winners also show up over a five-year period. Here are the leaders based on annualized returns in local currency terms.
1. Egypt -- 69%
2. Argentina 58%
3. Colombia -- 56%
4. Venezuela -- 52%
5. Indonesia -- 41%
6. Russia -- 39%
7. Pakistan -- 38%
8. Peru -- 35%
9. Sri Lanka -- 34%
10. Czech Republic -- 34%.