Emerging Markets Live!

06/23/2009 1:00 pm EST

Focus: MARKETS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of The Global Guru, says that emerging markets’ strong stock performance helps made a strong case for their growing role in the world economy.

A year ago, the "decoupling" of emerging markets was all the rage. The basic idea was [that] thanks to their strong domestic markets and prudent macroeconomic policies, emerging markets had "decoupled" from developed markets. [So,] both their economies and stock markets could easily withstand the negative fallout from recession in the United States and Western Europe.

But when the global financial storm hit, emerging market stocks were hit much harder than those of developed economies. While the Standard & Poor’s 500 index slumped 38.5% in 2008, thirty countries witnessed drops of 50% or more. Suddenly, the very word "decoupling" became anathema.

But there's nothing like a strong rally in emerging market stocks to revive a moribund theory. Since the start of 2009, Chinese stocks [have risen 58%], Brazil rebounded 32%, and India has soared 48%. Even Russia, the market that investors love to hate, came roaring back with a gain of [nearly 80% at its peak]. The S&P 500's [loss of 1%] seems barely worthy of mention.

The long-term story supporting emerging markets never really went away. Today, with a few notable exceptions, the emerging markets of 2009 have better growth prospects, larger foreign reserves, less sovereign debt, a more stable banking system, and higher savings rates than their Western counterparts.

The BRIC economies—Brazil, Russia, China, and India—together accounted for 7.5% of global output in 1998. That has doubled to more than 15% in 2008. China and Russia are even making noises about the creation of a new, global reserve currency.

Emerging markets today have dramatically increased their profile on the global economic stage, embarking on a massive acquisition spree in the US and Europe, buying up brands, technologies, and expertise. In the latest edition of the Fortune Global 500, 62 companies are in emerging markets. That's almost double the number on the list in 2003.

Decoupling skeptics point out that the US remains the engine of global economic growth. Asia is largely an export machine whose sole purpose is to re-stock Wal-Mart's shelves in the US. The economies of emerging markets have too little economic heft to pull the world economy out of its tailspin.

That's why emerging markets are, they argue, simply a leveraged play on the developed world. Even the best-performing emerging markets will grow more slowly than they did between 2004 and 2007. And emerging economies also have their share of ne'er-do-wells. Eastern Europe and emerging economies dependent on the US, like Mexico, will suffer disproportionately, while commodities-based economies like Russia, Brazil, and South Africa will thrive.

That said, the center of the world's economic gravity is clearly shifting toward the developing world. And if you think investing in emerging markets is risky, think about why buying stocks in highly indebted Western economies makes any more sense than buying the fast growing, solvent stocks of emerging markets. In 20 years, you'll be hard-pressed to tell the difference anyway.

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