With the emergence of electronic trading, even a world-spanning transaction needs only the click of a mouse to take place. But this interconnected market also has its dark side, because almost all the nations of the world were affected by the financial crisis. Many of the developed nations struggled to recover, but some developing nations were more fortunate. Many of them did not participate in what turned out to be the housing market bubble and were relatively unaffected when it burst. Now the economies of nations in Asia and Latin America, as well as the oil-rich Russia and the former Soviet-bloc countries of eastern Europe, could very well move ahead of their counterparts.
Emerging markets—financial markets in developing nations—are not new. They have been around since the 19th century. Traditionally, developing nations provided raw materials, such as petroleum and other resources, to the industrialized West but imported relatively few goods in return. Until a few years ago, these nations’ markets were best known for the extremes of their boom-and-bust cycles. As recently as 1997, many East Asian countries fell like dominoes under a series of bankruptcies, recessions, and other financial woes. In 1998, Russia defaulted on its debt, causing its market to tumble more than 80 percent. But since then, many developing countries have managed to balance their budgets and have improved in other ways that made their economies grow. This growth has brought prosperity. Low interest rates on loans have enabled local companies to prosper. These countries also have less national, corporate, and household debt than most developed nations do. People can afford to spend money on imported goods—and are ready and willing to invest in their own countries.
The Morgan Stanley Capital International (MSCI) Emerging Markets Index measures the performance of financial markets in 25 developing countries. They range from Egypt and the Czech Republic to Peru and Thailand, as well as Brazil, Russia, India, and China—also known as the BRIC countries. Recently, the MSCI Emerging Markets Index had grown 70 percent, in a single year.
Antoine Van Agtmael, the chairman and chief investment officer of Emerging Markets Management, coined the term emerging markets. He believes that after the crash of 2008 and the revival of 2009, “We have just had the best gains in the history of emerging markets, we need a bit of a breather. It’s not going to be the panic of 2008 and it’s not going to be the fabulous year we had last year.”
Some investors warn that emerging markets also have a dark side. Perhaps best known to Americans for its palm-tree-shaped artificial islands, the small Middle Eastern country of Dubai spent lavishly on these and other fanciful construction projects and then fell heavily into debt. When it failed to attract buyers or even renters for these sites, Dubai’s bubble economy burst and the country fell into a recession. Some investors also worry that housing bubbles like the one in the United States may be growing in China and Hong Kong.
But other investors, such as David Cohen of Action Economics in Singapore, are more hopeful. Cohen said, “The economic picture is brightening despite all the caution flagged by the central banks and finance ministry officials around the world. The data still continues [sic] to show a global recovery led by Asia.”
So far, emerging markets account for less than 3 percent of assets managed by American investment firms. But if these markets continue to do well, that number could double over the next five years.
Questions for Critical Thinking
1. Suppose one or more developing nations falls into a recession. What effect might this have on world markets?
2. Why do you think Americans have invested so little in emerging markets? If you wanted to convince a friend to invest in an emerging market with you, what arguments would you use?
Sources: Ed Johnson and Ron Harui, “Emerging-Market Stocks Gain, Erasing 2010 Loss; Yen Weakens,” Bloomberg Businessweek, June 23, 2010, http://www.businessweek.com; “MSCI Emerging Markets Index,” Investopedia, http://www.investopedia.com, accessed June 21, 2010; Jeremy Gaunt, “Global Investors Cut Stocks, Emerging Markets: Poll,” Reuters, March 31, 2010, http://www.reuters.com; “Emerging Market Stocks May Need a ‘Breather,’ ” Economic Times, March 17, 2010, http://economictimes.indiatimes.com; Tina Russo, “Big Upside for Small Stocks in Emerging Markets,” Forbes.com, February 8, 2010, http://www.forbes.com; Heather Timmons, “Emerging Markets Soar Past Their Doubters,” The New York Times, December 30, 2009, http://www.nytimes.com; “Dubai Property Prices Could Drop 20% More,” Property Frontiers, July 2, 2009, http://news.propertyfrontiers.com.
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