Emerging Markets

OUT OF FAVOR - The Economist

ARE investors falling out of love with emerging markets? The stockmarkets of developing countries were one of the few bright spots in investors’ portfolios during the first decade of the 21st century. But since October 2010 they have steadily underperformed markets in the developed world (see chart).

Emerging-market equities fell by 2.9% in May, leaving the MSCI EM index down by 4.4% since the start of the year compared with a 10% gain for the world as a whole. Other asset classes have been equally disappointing. 

The danger is that companies in the developing world may have overinvested on the expectation that rapid growth would continue. Martial Godet of BNP Paribas points out that the return on equity for emerging-market firms has fallen from 17.7% in July 2008 to 13.2% today.

The question is whether the recent underperformance is part of a longer-term cycle, like that in the late 1990s, or a shorter-lived development as in late 2008 and early 2009. Some of the current worries may be overdone. Just as investors often become overenthusiastic about emerging markets during booms, they can get too depressed in bear markets. Emerging markets still offer faster growth than the rich world. They have much better fiscal positions, too: government debt averages 33% of GDP.

The best rule of thumb is not to buy emerging markets when they are the consensus trade and when they look relatively expensive. At present emerging-market shares trade at a 25% discount to their developed-market peers. They have been cheaper in the past, but a further period of underperformance will make them very attractive to long-term investors.

Veja a reportagem completa: Out of Favor, The Economist.