The End of the Emerging-Market Party

Enthusiasm for emerging markets is evaporating, as their stocks and bonds are down for the year and their economies are slowing. And, with stable or lower export prices reducing real growth and causing their currencies to weaken in real terms, the buoyant performance of the recent past is unlikely to return any time soon.

CAMBRIDGE – Enthusiasm for emerging markets has been evaporating this year, and not just because of the US Federal Reserve’s planned cuts in its large-scale asset purchases. Emerging-market stocks and bonds are down for the year and their economic growth is slowing. To see why, it is useful to understand how we got here.

Between 2003 and 2011, GDP in current prices grew by a cumulative 35% in the United States, and by 32%, 36%, and 49% in Great Britain, Japan, and Germany, respectively, all measured in US dollars. In the same period, nominal GDP soared by 348% in Brazil, 346% in China, 331% in Russia, and 203% in India, also in US dollars.

And it was not just these so-called BRIC countries that boomed. Kazakhstan’s output expanded by more than 500%, while Indonesia, Nigeria, Ethiopia, Rwanda, Ukraine, Chile, Colombia, Romania, and Vietnam grew by more than 200% each. This means that average sales, measured in US dollars, by supermarkets, beverage companies, department stores, telecoms, computer shops, and Chinese motorcycle vendors grew at comparable rates in these countries. It makes sense for companies to move to where dollar sales are booming, and for asset managers to put money where GDP growth measured in dollars is fastest.

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