Investors in emerging markets have suffered horrible losses. Figures from MSCI show that emerging markets generally have lost 54.4 per cent (in dollar terms) in the last 12 months, while the much-hyped Brics (Brazil, Russia, India and China) have lost 60.5 per cent. That compares to falls in developed markets of 40.5 per cent.
These numbers just remind us of what we should have learned in 1994, and again in 1998 - that emerging markets are, mainly, just a geared play upon developed ones. When major markets do well, emerging markets do fantastically. And when major markets fall, emerging ones collapse. For all the talk of decoupling, emerging markets still rise and fall mainly according to liquidity conditions and risk appetite in the west, more than because of any particular local merits. The chart below, showing the MSCI Emerging Markets index and the MSCI G7 index, illustrates this:
It's bad because it reminds us what we should always have known - that the idea that emerging markets are an attractive investment because of these economies' superior long-term growth prospects is just daft. Growth prospects may well be superior, but this has not stopped emerging markets falling terribly.
And, logically, there's no reason why it should. Even if we grant that, say, China will continue to grow faster than the west, this alone cannot justify share prices there rising when they're falling everywhere else. For one thing, markets should have discounted such golden prospects ages ago (and a quick look at average emerging market PE ratios during the boom years suggests they did). What's more, long-run economic growth need not benefit existing, quoted companies. The benefits might go to foreign firms, or unquoted ones, or to firms that do not yet exist - or, heaven forbid, to citizens.
The good news, though, is that the fact that emerging markets are just leveraged plays upon developed ones could produce some spectacular gains when western markets start to recover, and maybe more so than usual this time.
There'll come a time when liquidity conditions will improve whilst at the same time all major economies - the euro zone, UK, US and Japan - will have near-zero interest rates. This could be a recipe for a massive flow of cash into emerging markets. There's a precedent here. In the early 90s, the Fed held interest rates down so it could sort out the savings and loans debacle (caused, if you remember, by reckless lending against real estate and inadequate regulatory supervision). As this crisis abated, a wall of money flooded into emerging markets, causing prices to surge in 1993. Those investors who were clever, or just lucky, jumped off that particular bandwagon before it crashed in 1994.
