There have been sharp falls this month in several markets, from India to Turkey, reflecting concerns about weakening currencies. But even before those declines, emerging markets were underperforming relative to developed markets to an extent not seen since the Asian currency crisis of the late 1990s.
As can be seen in the accompanying charts, the MSCI Emerging Market Index is down more than 10 percent this year, while the world index, covering all developed markets, is up an equivalent amount.
That disparity is not caused by one or two exceptional performers. The charts list the 10 largest emerging markets, as measured by the market capitalization of their stocks. Each has lost money this year. Among the 10 largest developed countries, all but two markets are up for the year, measured in United States dollars to adjust for currency fluctuations. The exceptions are Australia and Canada, which came through the financial crisis relatively well and until recently had been prospering from exports of raw materials to emerging markets, particularly China. And both of them are up when measured in local currencies.
The use of dollar figures hurts the reported performance of some emerging markets. The South African and Malaysian markets are up a little for the year, measured in local currencies, but down when measured in dollars. In India and Brazil, the local-currency market declines are less than half as large as the dollar-based figures shown.
The Asian financial crisis, in which developing countries that had maintained fixed exchange rates were forced to abruptly devalue their currencies, turned out to have a lasting effect. Countries decided that it was critical to run balance of payments surpluses and to build up foreign currency reserves. The willingness of the United States and Europe to run large deficits helped.
That stood the developing countries in good stead when the credit crisis erupted in 2008, but afterward, it became harder for the developing countries. Srinivas Thiruvadanthai, the director of research at the Jerome Levy Forecasting Center, notes that some of them, including India, Brazil and South Africa, are now running substantial deficits.
The world as a whole cannot, of course, have a surplus or deficit in its balance of payments. And last year the European Union ran its first annual surplus in more than a decade, while the deficit in the United States has declined.
After the Asian crisis, emerging markets did very well. The MSCI Emerging Markets Index, shown in the chart, outperformed the MSCI World Index in every year from 2001 through 2007. It did worse in 2008, when all markets crumbled, but again did better in 2009 and 2010 as it became clear that emerging markets had fared much better than developed economies.
For the decade from the end of 2000 through the end of 2010, the developed market index rose a scant 5 percent. The emerging markets index more than tripled during the same period. Since then, however, the developed markets have risen nearly 20 percent, while the emerging ones have fallen about the same amount.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
Article source: http://www.nytimes.com/2013/08/24/business/economy/a-surprising-reversal-for-emerging-stock-markets.html?partner=rss&emc=rss