Investment Adventures in Emerging Markets

Reviewing 2009, Looking Forward to 2010

This is my first blog in 2010. As we welcome the New Year during this festive period, it is also a time for reflection…

2009 was an amazing year in the way that emerging markets rose like a phoenix from the ashes. Emerging markets surged in 2009 as a result of many factors, perhaps most significantly the rapid increase in money supply due to global stimulus packages. Solid economic growth, high foreign reserves, low debt-to-GDP ratios, stronger domestic currencies, a rebound in commodity prices, low inflation, low interest rates and investors’ desire for higher gains also supported strong asset flows. In the first 11 months of 2009, emerging markets recorded nearly US$75 billion in net inflows, nearly 40% more than the record-high US$54 billion of net inflows in 2007.1

While I am positive for emerging markets in 2010, given their greater volatility, I also expect corrections along the way, especially following a rapid run-up like we saw in 2009. I welcome these corrections most of the time because to me, they mean that valuations will become more reasonable, presenting buying opportunities. I believe valuations are still not excessive, since we are now around the middle of the 10-year historical valuation range, according to our analysis.

In my opinion, a few factors could inhibit the rapid rise of emerging market equities in 2010:

1. Robust activity in the IPO market, which could draw substantial assets from existing positions. Our calculations indicate that more than $250 billion in IPO proposals are waiting to come to market.

2. Volatility in commodity prices, which are characteristically highly volatile, despite (or perhaps consequent to) their sharp rise in 2009.

3. To the extent that the major U.S. market does not gain traction for imports, it could have a knock-on effect for emerging market exporters, even though big markets such as China have themselves become large importers.

4. Risks inherent to emerging markets, such as the inability of governments to control derivatives markets, loss of investor confidence, over or poor regulation in various industries, adoption of protectionist measures, or abandonment of the market economy philosophy.

However, I believe the fundamental strengths of many emerging countries will see them through to a high-growth trajectory in the medium to long term. Looking to 2010, I remain positive on emerging markets for a number of reasons:

1. Thanks to huge stimulus packages implemented globally, many countries have already returned to positive growth and I expect that growth to strengthen in 2010.

2. Risk-adjusted returns on capital and domestic demand growth in emerging markets is higher than those in developed countries, continuing to attract capital investments to emerging nations.

3. Credit expansion for real estate investment continues in a number of emerging market economies.

4. Several markets have major infrastructure construction plans, which should lead to substantial economic activity.

The BRIC countries in particular (Brazil, Russia, India and China), are among the world’s fastest-growing economies. Together, they account for more than 50% of the total population in emerging markets, and domestic demand remains robust. I believe they will continue to be a key driver of global economic growth. In 2009, growth in China and India, the world’s most populous countries, outpaced growth in developed countries despite the global economic slowdown. The International Monetary Fund forecasts GDP growth for the two countries in 2010 at 9.0% and 6.4%, respectively.2
Meanwhile, Brazil and Russia are resource-rich countries and are likely to benefit from rising global demand for energy, metals and other commodities, while their domestic markets continue to flourish. In addition to traditional emerging markets, the progression of a “younger generation of emerging markets” – the frontier markets – should prove to be exciting as these markets come to the forefront.

I expect to continue to find investment opportunities in emerging markets during 2010 and believe that there may be an increasing amount of money directed to the asset class over the next 10 years, as investors realize that they may be able to buy better value at a better price, compared to developed markets. The rapid developments in emerging markets should allow these markets to command even greater attention in the global investment universe. In my opinion, emerging markets such as China, Brazil and India could eventually become some of the world’s most important and influential countries.

Here’s wishing you a very happy, healthy and prosperous 2010!

1. Source: EPFR Global (

2. Source: IMF World Economic Outlook, October 2009.

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