Whatever happened to emerging markets?
Amid the shining stars of investments in 2013, emerging markets stand out. Not as bright points, but as black holes. China was flat. Russia was down 10%. Brazil was down 25%. An emerging market composite declined 6%.
After a decade of being the investing world’s darlings, these markets are struggling. The catalyst appeared to be the “taper talk” last May. Of course, that discussion was no real surprise. We’ve known that ultra-low interest rates couldn’t last forever, and that when the economy moved back towards normal, so would bond yields.
But rising rates remove a big rationale for emerging markets: growth. When it seemed developed economies had entered a “new normal” of slower growth, investments migrated to the developing world, where population growth and technological advances provide stronger potential. When growth returned to the US and Europe, the money came back. Economies in Asia, Africa, and Latin America that had become dependent upon massive capital inflows found that they couldn’t fund their current account deficits. The adjustment has been severe.
So now instead of the BRICS we now have the Fragile Five, which appear on the brink of a crisis. But today’s emergency is tomorrow’s opportunity; low prices lead to higher returns. The best time to buy equities recently in the US was in March of 2009, when our own crisis seemed darkest.
Capital seeks return. It may take time, but global trade and domestic commerce will lift these economies. China may not rule the world any time soon, but it still provides tremendous opportunities.
Douglas R. Tengdin, CFA
Chief Investment Officer