Not all emerging markets are the same...

"Every beginning is a consequence - every beginning ends something"
Paul Valery

As I mentioned in my previous post, it does certainly appear as if the unstoppable outperformance of emerging markets has hit an invisible wall recently and is now coming to an end. But is it a logical result of slowing global growth, or rather simply a short term trend that is likely to reverse itself during the next several months?

Unfortunately for the global market cheerleaders, I believe that era of worry-free investing into emerging markets is coming to an end, and only those, who actively manage their allocation to specific markets/securities instead of relying on a bunch of broadly diversified international mutual funds, have a chance of repeating the solid double digit historical returns from the past several years. Market does not seem to really care about the blistering short term financial results, as was the case in the past, but instead actually is now paying attention to "formerly unimportant" quality of earnings, political risks and longer term macroeconomic projections.

So is the recent severe under performance of emerging markets at all unreasonable? Isn't Chinese GDP still growing by 10%+ a year, and Brazilian and Russian consumers are still willing to pay insane amounts of money on the bunch of unlocked 3G iPhones? Or how about the simple fact that even after a recent 20% haircut in prices of most commodities, virtually every tangible resource out there is still trading at prices much higher than a year ago? Shouldn't the cost cutting efforts of virtually every financial institution in benefit outsourcing titans of India and Eastern Europe? Not so fast.

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by The Freshman |  08/15/08