September 2010

Since 2008, investor’s view on emerging markets has rapidly changed. Today, the « bad students » have surpassed their « masters », which committed every possible mistakes. Let’s illustrate it with a simple example : when the IMF has to rescue Greece – a member of the EU, defined as a developped country – Turkey refused the extension of IMF’s funds. What a paradox ! The growth of emerging economies continue his way while european countries have to fix austerity plans. One thing is sure ; emerging countries saved the global economic growth of an almost total blackout.


Figure 1 : Emerging Markets Vs Developed Economies

The chart above shows the growth of both MSCI Emerging Markets (composition : Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela

, Bloomberg ticker : MXEF:IND, in green) and MSCI World Index, composed of the most developed economies (Composition : Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, United States

, Bloomberg ticker : MXWO:IND, in orange). The comparison is quite easy ; emerging markets have passed the financial crisis with less damages. The MSCI world index increased by circa 50% between february 2009 and september 2010, while the MSCI EM index doubled during the same period. Another statistical comparison ? In the last ten years, the ROI of the MSCI Emrging Markets Index is about 8,8% (in USD) versus -2% for the MSCI World Index. What else ?

Statistics aside, emerging markets show three other relevant advantages, compared to developed economies : land, capital and population.

By Land, I mean the concentration of natural resources, their strategic location and the quantity of arable land. 80% of these resources are based in emerging countries.

By capital, I mean « cost of capital ». Firstly, today developed economies have to pay more for their sovereign debts than emerging markets. Secondly, sovereign debt of emerging markets represents only 6% of the global debt. Finally, capital is also measured by FDI, whose biggest recipients are emerging markets.

By population, I mean the young and growing population of emerging countries, which lead to an increase in incomes per capita, increasing by the way the consumption and, of course, the GDP. This is certainly the most important item.

In short, in the one hand. what we usually call developed countries will have to pay for their debts. In one way or in another, taxpayers will have to pay the bill (with more taxation or inflation). In the other hand, emerging countries present a growth of 5-7% a year, with a growing population, per capita income and GDP.

What do you wanna do now ?