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Emerging markets: Miles to go! - Views on News from Equitymaster
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  • Sep 22, 2003

    Emerging markets: Miles to go!

    One important facet of globalisation is the integration that financial markets are witnessing over the years. While this integration has increased the magnitude of risks in individual financial markets, it has brought in depth and resiliency (although at differing levels). However, changes that have taken place in the developing countries' marketplaces have been quite revolutionary in the past few years, especially after the global stock market meltdown in 2000.

    While the dependency of developing markets on developed world for trade has not changed significantly, as far as financial markets are concerned, developing markets (broadly known as emerging markets) have gained a lot of attention in the recent past. The graphs below indicate the relative returns of equity markets from both the developed and developing nations. While these graphs are indicative of the increased strength that emerging financial markets have displayed over these years, what has gone behind that is even more enlightening.

    As seen from the graphs above, both developing and developed markets have not provided a great deal of return over the period between January 2000 and January 2003. The fall in the latter is much greater than the former. This is understandable due to three broad reasons. During the tech market rally in 2000, valuations were stretched beyond fundamentals. With earnings going nowhere, returns have not been good. Secondly, post 2000, all the three major economies viz. US, EU and Japan have been growing at a much slower rate compared to emerging markets. Lastly, events like September 11 and corporate misconduct have shaken investor confidence in these economies significantly.

    At the same time, the fact that investors found greater value in developing markets cannot be denied. And this has been because of the relatively higher levels of growth that the developing economies have witnessed during these years. Take a look at the table below.

    Real GDP growth rate (%)
    Developing 1999 2000 2001 2002
    Brazil 0.8 4.5 1.4 1.5
    S. Korea 10.9 9.3 3.2 6.3
    China 7.1 8.0 7.3 8.0
    Egypt 6.3 5.1 3.5 3.0
    India 7.1 4.0 5.5 4.3
    US 4.1 3.8 0.3 2.5
    UK 2.4 3.1 2.1 1.8
    Japan 0.2 2.1 0.8 0.5
    Germany 2.1 2.9 0.6 0.2
    France 3.2 4.2 2.1 1.2
    Source: Economist

    Going forward, developing markets will continue to remain an area of focus considering the fact that most of these economies are expected to outgrow 'The Big Three'. But economies like India and China, the fastest growing among developing nations, will have to take hard measures for boosting growth. This would then entail implementing structural, monetary and fiscal reforms and reducing levels of corruption (that has been a bane on the development of the emerging nations).



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