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Market Review: Developing Markets
Emerging markets closed 2009 on a high after further gains in December pushed the MSCI EM index to its best level for the year, which also meant its biggest ever annual percentage gain. More importantly, investors recovered a large proportion of the losses that they had incurred in 2008, an unlikely prospect in the dark days of early March. Although the rebound has been remarkable in terms of its rapidity, it has been a traditional one with respect to its triggers. Initially confidence began to revive as it became evident that governments’ emergency measures were beginning to have a positive effect. Then investors correctly anticipated the unwinding of the massive global inventory correction. The improvement in risk appetite manifested itself in several forms. Emerging bond premiums over US Treasuries collapsed at an unprecedented rate; weak currencies recovered against the USD with some, such as the Brazilian Real, eventually recording hefty gains on an annual basis; and international money started to rapidly flow back into local markets after having previously gushed out. While all equity sectors rose significantly, there was a strong preference for cyclical stocks. Normally, cyclical shares trade at a big valuation discount to defensives, but this gap, which had been of unprecedented size during the crisis, has now closed completely with respect to its historical average. This was reflected in sectors, such as materials and technology, more than doubling while telecoms and utilities went up less than half that amount. The winners in terms of individual markets were those that combined strong macro-economic fundamentals and above average exposure to cyclical sectors, with Brazil and Indonesia leading the pack. This was also true at the regional level where Latin America did much better than either Asia or EMEA.
Despite upward revisions in the second half of 2009, the consensus earnings forecast for 2010 is still lower than it was at the close of 2008. Yet surveys suggest that investors still expect emerging markets to enjoy much stronger than average returns in 2010 and to rise to a premium to the global average valuation.
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