With developed nations awash in debt, emerging markets regain their luster
You can boil down the appeal of emerging markets for investors to three words: growth, debt, and fishmeal.
For over a decade, industrializing countries like Brazil and China have drawn investors seeking to ride their rapid economic growth. Now, money managers are looking to places that feed these emerging giants — like Peru, the top source for fishmeal, a key ingredient in animal feeds.
Since the financial crisis hit, cash has flooded into the developing world from those seeking better returns and safety. Unlike developed countries whose governments borrowed heavily for stimulus spending, countries in South America and Asia have smaller debt burdens and higher bond yields.
So far, investors’ bets in developing countries have paid off. The MSCI emerging market stock index posted a 78 percent gain for 2009 and is up 3.8 percent this year. Funds that invest in emerging-market bonds returned 32 percent last year.
Ask Francisco Alzuru, at Hansberger Global Associates, to explain the popularity of emerging markets and he’ll tell you about fishmeal. It’s essentially anchovy powder. Anchovies are hauled from the Pacific and mashed into a flour, which is then turned into feed for hogs and fish in China.
To Alzuru, fishmeal represents increasing trade within the developing world and economic expansion beyond the so-called BRICs: Brazil, Russia, India, and China. Those four emerging-market stars still claim the bulk of investors’ funds, but Peru, Turkey, and others have seen a surge in cash.
Peru’s economy, for instance, has grown at an annual rate above 7 percent, a “China-type speed,’’ fueled by exports of copper, textiles, and fishmeal to Asia. That growth has given individual Peruvians higher incomes and more money to spend.
In the 1990s, emerging-market investments were a great way to lose money. The Asian financial crisis, Russia’s debt default, and other events crushed many investors. But Brad Durham, at EPFR Global, said it’s remarkable how quickly attitudes have changed. In a typical year over the past decade, he said, investors might have dropped $15 billion into emerging-market stocks and $9 billion into emerging-market bonds. Contrast that with the haul for emerging-market funds so far this year: $40 billion into stocks and a record $25.6 billion into bonds.
“The idea that emerging markets are a risky asset has started to unravel,’’ Durham said. Judging by the flow of cash, investors seem to fear US stocks. EPFR’s data shows they’ve pulled $23.4 billion from US equity funds this year.
The IMF forecasts that the United States and other advanced economies will collectively expand 2.5 percent this year and the next. Its forecast for developing countries: 6.3 percent and 6.5 percent.
Plenty of risks remain, though. One danger is anger in Congress about China’s currency policy. A tariff on Chinese goods, for example, would also pinch Indonesia, which sends coal to China.
Matthew Craft writes for the Associated Press.