Looking back over the past decade, the performance of emerging markets has brought approving comments from even the most hardened critics.
The region has risen in status, improved immensely in terms of stability and has exhibited superior growth characteristics that have become hard for investors to ignore. Indeed, when pitched against developed markets, the level and speed of growth within the region is even more impressive. At the conclusion of the decade, the MSCI Emerging Market index had posted gains of 161.4% for the 10-year period beating all expectations, compared with a 14.8% return for the FTSE All World Index, proving ‘the noughties’ was truly a pivotal decade for the region, establishing emerging markets as a key player going into the next decade.
Crucially, during the financial crisis of the past two years, China and India managed to avoid sinking into a recession. By contrast the US, UK and eurozone all battled to stimulate economic growth. Brazil and some Asian economies may have slipped in early 2009, but they quickly recovered and pushed into positive GDP territory, with Brazil doing well in the run up to 2010. If there was an area of significant weakness it was to be found in the former Eastern Bloc, where market softness owing to sovereign debt issues could be traced to the sub-prime credit market crisis.
Brazil’s stellar performance has been supported by strength in industrial, consumer and financial stocks, as well as the wider commodity sector, where Brazil displays some dominance owing to plentiful oil reserves and metal deposits. Looking further into 2010 demand looks set to remain strong as Asia’s appetite will increase, as its own economy recovers. We think these attributes, combined with the effects of the weakening US dollar will continue to attract investors, keen to exploit new opportunities, into the region. From a domestic demand perspective fiscal policy looks to remain supportive. Government tax cuts have been extended into March 2010 and the economy is generally well prepared for growth going forward. Rising inflation levels have been highlighted as a possible cause of concern, but we feel these could be supportive towards the equity markets, channelling funds in their direction of the global emerging markets.
Overall, the emerging financial markets are currently enjoying high levels of liquidity, alongside supportive fiscal policies, creating a favourable outlook for economic growth and market performance. Domestic and external demand is strong, and looks relatively stable for the future.
Money rolled into the equity markets during 2009, on the back of a strong outlook for emerging markets. Although gains may be more challenging to capture going forward than simply holding the whole market, for a committed stock picker the prize could be great rewards.
Alex Tarver, EM product specialist, HSBC Global Asset Management
