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Emerging Markets’ New All Time High

By Ichiro Suzuki

It was totally unheralded and made only small headlines. On January 8, the MSCI Emerging Market Index rose to a fresh all time high, eclipsing the previous high on October 31, 2007.

On its way to the previous high, EMs went ballistic in 2003 through 2007, returning an annualized 40% for a five year period through the date it peaked. The future of those up and coming countries looked so promising, and their share in the global economy was moving upward fast. The 21st century was going to belong to these emerging countries, so it was believed.

It was a mirage, as it turned out. A month after the peak at the end of October, the U.S. economy had entered a recession, very deep one at that, as it was later determined by the National Bureau of Economic Research (NBER). This severe downturn would be later called “The Great Recession”. The subprime crisis in the U.S. housing market brought down the banking system into a deep black hole, taking the system in the rest of the world down with it. Ten and a half months after the EMs’ peak, Lehman Brothers blew up, sending the global economy into a tailspin, to the brink of Depression 2.0.

While Depression 2.0 was averted, economies that were dependent on American consumers’ profligacy were hit even harder than the U.S. as profligate customers tightened their wallets. Export dependent economies in Europe, Asia, Latin America and Africa struggled due to acute demand shortage. They were rescued by China‘s massive fiscal policy that provided much needed demand for the global economy. 

Demand shortage hit prices of commodities especially hard. Countries in the Middle East & Africa, Latin America and Russia have been dependent on exports of fossil fuels or mineral resources. They never succeeded in taking their economies to the next level, failing to convert the riches of commodities into competitive manufacturing or service industries, as optimists once dreamed of.  

South Africa’s African National Congress (ANC) keeps proving their incompetence and corruption. Russia’s Putin and Turkey’s Erdogan are obsessed with national pride while being almost illiterate on the economy. Brazil have been caught in a series of big messes since the Great Recession. With its economic growth rate no higher than the U.S. today, Brazil is ceasing to be “a country of the future”. Mexico’s oil fields in the Gulf are aging while crude oil remains Mexico’s key export item. Mexico has a distinction of being governed by a left wing populist at a time of right wingers’ dominance in the world’s political scenes. India’s Modi is taking the world’s largest democracy  to the brink of autocracy. Under Modi, India’s economic growth rate has slowed considerably. Only the Chinese Communist Party sets itself apart from the rest of the EM pack in economic management. Never mind the CCP’s human rights record. It is not possible to invest in EMs dodging ruthless authoritarian rulers. Advocates of human rights and democracy should be sticking with the developed world. While China leads the world in growth rates, Its economy is growing at a half the rate of those boom years. It is no longer appropriate to call this pack “emerging”. Their economies have lost considerable luster since the booming early years in this century. In addition to it, South Korea and Taiwan, two heavyweights in the index, have long been far too rich to be considered as ‘emerging’. In South Korea, in particular, its per capita income is on pace to catch up with Japan in the near future. They are still called ‘emerging’ simply because of capital controls on their currencies. 

Components of EMs have shifted considerably since those boom years. China now accounts for a half of the EMs, way up from approximately 17% , driven by the rise of Chinese tech. In the meantime within China, SOEs in a variety of industries sank collectively, be they banks, real estate developers, energy, utility or telecom.

Among  Asian tech, Alibaba, Tencent, Samsung and TSMC account for over 20% of the market. If one wants to invest in tech, however, why would they have to insist on EMs? The Nasdaq always offers a better tech exposure. 

Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

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