Emerging Markets: Then And Now
Ten years removed from the Asian financial crisis of 1997 the countries which were most affected by the event have rebounded and then some, and market pros say the risk of simliar events in the future have decreased now and emerging markets continue to look like a good long-term bet.
"Asia is radically different than in 1997," says Lawrence Goodman, head of emerging market strategy at Bank of America.
But while Asia has recovered nicely from the crisis -- the seed of which was the floating of the Thai baht on July 2 -- other emerging markets may provide better value at this point, fund managers say.
Emerging markets stocks, as a whole, are up about 27% in the last five years, easily outperforming the United States gains of approximately 9% over the same period.
"We think there is a broad market opportunity," says Terrence Gray, managing director of emerging markets at DWS Scudder, an arm of Deutsche Bank. "There are 35 countries in our universe with great growth opportunities. Emerging markets are one of the best growth stories and we still think if you look out the next five years, it is certainly the trade for investors."
The Emergence of Emerging Markets
Emerging markets came of age in the 1990s and they also came to signify volatility and vulnerability for investors around the world..
In half a decade, investors experienced the Mexican peso crisis in 1994, the Asian contagion of 1997, the Russian debt crisis of 1998 and the Argentina economic crisis, which started with the country's plunge into recession in 1999 and culminated in its historic default in 2001.
But of all those crisis, it was the one triggered by Thailand's currency devaluation in the summer of 1997 that made the biggest impression. Trouble quickly spread to South Korea, Malaysia and Indonesia, but the reverberations were felt worldwide. With the Mexican peso crisis of 1994 still fresh in their minds, Western investors became nervous and moved quickly to pull out money, creating a domino effect, which toppled one market or another on any given day for months.
On Oct. 27, 1997, for instance, the Dow Jones Industrial Average plunged 554 points, or 7%, its third largest point decline in its history. Panic selling triggered so-called circuit breakers -- measures created after the 1987 crash meant to slow or halt trading during traumatic market meltdowns. The New York Stock Exchange halted trading and closed early for the first time ever. When the dust settled that day, markets around the world suffered a one-day loss of approximately $1.2 trillion in market capitalization.
The Asian financial crisis exposed longstanding weaknesses in the financial systems of South Korea, Thailand, and other emerging markets, which are now stronger as a result since it prompted policymakers to implement drastic measures to reduce its reliance on foreign borrowing.
Global economists attribute Asia's transformation to its integration into the global economy and trade liberalization has helped sustain rapid growth.
The region's fiscal makeover and shift from indebtedness to stores of wealth, says Bank of America's Goodman, has made the balance sheets of emerging Asia stronger than ever.
"Another key factor is that growth in emerging Asia is more internally driven today than it was in 1997," says Bank of America's Goodman. "Much more of the growth is originating locally, almost embryonically."
Country By Country
Then And Now
Here's a look at the markets hit the hardest in the late 1990s and their growth prospects today.
1. South Korea
Then: Corporate insolvencies, a massive billion International Monetary Fund bailout
Now: Financial reforms helped the world's eleventh largest economy to surpass the trillion dollar level in 2004. The United States' seventh biggest trading partner saw its benchmark KOSPI index continues to make record highs in 2007 as the country's growth prospects continue to look solid.
Then: With companies defaulting on loans left and right, Thailand floated the baht in July 1997, prompting a rapid 20% decline in the local currency. A month later, the IMF provided a bailout package totaling $20 billion. After the dust settled, the baht's value was cut by more than half while the Thai stock market plunged 75% in 1997.
Now: After building up a stronger infrastructure and implementing investor-friendly policies, Thailand looks to have fully recovered from the 1997 financial crisis. Thailand's recovery has been fueled by external demand for exports from the U.S. and Japan.
But despite annualized stock market gains of 23% in the last five years, a catastrophic tsunami in 2004 and Thailand's bloodless coup in 2006 have kept many investors on the sidelines.
Then: Brazil's debt increased steadily beginning in 1994, leading to to major currency declines in 2001 and 2002.
Now: The country made improvements to its debt profile starting in 2003 and South America's leading economic power should continue to benefit from its vast natural resources and China's insatiable thirst for commodities.
4. Chindia (Chinaand India)
Then: China, along with Taiwan, Singapore and Vietnam, were relatively unaffected by the 1997 fiscal crisis.
Now: Fiscal liberalization has led to rapid growth and a flood of foreign investments. While many market strategists see both regions as currently overvalued, almost no one questions the long-term growth prospects for both countries.
Then: In 1998, the Russian government defaulted on external debt.
Now: The former Soviet state has benefited from reforms put in place by President Vladimir Putin, but political risks and heavy leverage towards the energy sector has deterred some foreign investors.
Fund managers such as Gray are now putting money to work in "frontier markets," which include Pakistan, the Persian Gulf region and certain countries in Central America and Central and Eastern Europe.
"We still view those stories as being undiscovered and having strong growth stories," says Gray. "We think the Middle East has been unexplored as an investment opportunity; parts of Latin America (link) still have very strong growth and there's lots of markets where investors aren't as heavily weighted."
While risks of potential shocks to emerging markets remain higher compared with developed regions, the chance of being rewarded handsomely for carrying that risk remains an appeal to many investors.