Defining a Developed Market
11/09/2009 11:47 am EST
By a variety of yardsticks, the leading Asian and South American markets enjoy the best economic climates in the world, writes Eoin Treacy of Fullermoney.
If one defines developed markets as those which have improving standards of governance, budget surpluses, fiscal discipline, firm banking sectors, strong economic growth, improving credit ratings, increasing foreign currency reserves, falling default rates and improving infrastructure then one would have to make a leap of faith to include the USA, much of Europe, and Japan on that list. On the other hand, a large number of so called 'emerging markets' or as we prefer to call them, progressing markets, fulfill most if not all of these criteria.
It is no mistake that the economies rebounding fastest from the credit/liquidity crisis are those which had least to do with its root causes. The reforms instituted across much of Asia following their financial crisis a decade ago left investors suspicious of opaque highly leveraged products and they tended to eschew purchasing them. It helped that there was an abundance of higher yielding regional investments to choose from which was contrasted with contracting premia in the USA and Europe prior to the crisis.
There is a distinction worth making between leading and best performing markets. Indices in progressing Asia and commodity producing Latin America were among the first to bottom last year and so led the market higher. Most other indices bottomed in the first quarter of 2009. Subsequently, a number of Eastern European markets have rallied impressively and outperformed Asian and Latin American markets this year. However, the performance difference is relatively small when recoveries from the lows are taken into account.
Leadership in terms of timing is an absolute whereas performance is a relative comparison. Over the course of bull market, the original leaders will be among the best performers for a substantial part of the move. However, since they tend to move into corrective phases first, there will also be times when they will underperform other markets. This is a natural part of a bull market cycle.
How do banking sectors compare to one another? Sentiment towards banks remains grim and it is hard not to get emotional when considering the outlook for bank shares when taxes have been raised, currencies diluted and investments destroyed because of the sector's hubris. Banks in the US, UK, Japan and Europe bore the brunt of last year's sell-off, continue with high leverage ratios and have huge holes in their balance sheets. However, not all banks, globally, are in this state. In fact many are quite healthy.
In terms of absolute performance over the last year, the banking sectors of Ireland, the US, Japan, and the UK are at the bottom. Asian and commodity producing countries are at the top and many of the European indices are somewhere in the middle. When we rebase the list to a common currency such as US dollars, the order changes somewhat but the general trend remains the same.
In both local currencies and US dollars, charts illustrate that the Asian financial sector is on a long-term trend towards outperformance relative to that of the US.
A somewhat subtler interpretation is that while the US banks which survive this crisis will come through the process at a competitive advantage within their domestic market, internationally they are likely to encounter increasing opposition from better capitalized competition from comparatively firmer economies.