Emerging markets have produced volatile and generally disappointing returns during the past five yea...
Emerging markets have produced volatile and generally disappointing returns during the past five years. Notwithstanding a spectacular 1999, the Morgan Stanley Emerging Markets Free Index produced a negative return of 11% over this period. A poor show against an increase of 75% for the FTSE All-Share Index.
While volatility is almost certainly likely to remain with us, there are reasons for anticipating better days ahead for this asset class.
Foreign direct investors continue to take advantage of depressed stock market conditions by tapping into these potentially huge consumer markets. With corporate earnings beginning to reflect a more supportive economic background, portfolio investors have recovered and followed suit.
The demographics of emerging countries favour higher rates of economic growth. In many third world countries, half the population is under the age of 20, while overall population numbers are also increasing much more rapidly. The problem of a growing elderly population, being supported by a static workforce, rarely applies.
With their low cost advantages, emerging market companies will continue to be major beneficiaries of Western and Japanese corporates outsourcing labour-intensive, non-core activities. Unskilled wages in China are, for example, less than one-tenth of those in the US.
The growing number of emerging market companies, which can successfully establish strong production relationships and effective communications with the design and marketing divisions of developed world companies, will do especially well over the coming years.
While the people living in emerging countries still have relatively low expectations, they have shown a desire to improve their lot. Governments may be more autocratic but they are often less burdened (Latin America excepted) with expensive welfare systems and powerful trade union lobbies. There are pockets of strong entrepreneurship in Chile, Egypt, Hungary and China.
A major factor behind the fall of emerging market stock markets has been declining commodity prices.
These have recovered strongly over the last year and look like remaining firm for some time yet.
While it is difficult to be positive about any real long term growth in resource prices, consolidation/privatisation of the sector is likely to lead to more commercial pricing policies being adopted going forward than in the past.
While no markets will be spared from a major fall out in US stock markets, we anticipate strong absolute and relative performance from emerging markets once Nasdaq stabilises at more reasonable levels.
Angus Tulloch is head of emerging markets at Colonial First State Global
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