2009 Emerging Markets

The MSCI Emerging Markets Index fell from 54% during 2008. Many have laughed at those who suggested that the emerging markets will perform better than the established markets. Sure, "de-coupling" did not occur. The problems in the US and Europe split over into all other markets. But by the same token, none of the popular investment concepts worked either. Diversification did not work, all markets and all industries got clobbered. The destruction of wealth occured in every market be it equities, commodities, currencies, you name it. If there was a theme for 2008, it was disintegration.

The housing slump in the US will take a couple of years (optimistic) to work itself out. This is not helped by the US governement pumping money into the system to prop up ailing banks. The urgency and market discipline will be lacking and the market will take a while to find the bottom and make the proper adjustments.

Unlike developed developed economies which have multiple drivers, most emerging markets have a central theme. They are energy based, commodities based or like China, simply a huge market that has only started moving. As the world starts to recover, the demand for these products will rise again leading the emerging markets out of the current difficulties.

These markets have fallen more than the developed markets simply because of the lack of liquidity. By the same token, there is more upside.

The MSCI China Index fell 60% in 2008 having risen some 370% from 1 November 2004 through 31 October 2007. Much of this was due to indiscriminate selling by hedge fund (to meet margin calls) and traditional funds (in anticipation of redemptions). Slowing demand for Chinese goods from the US and Europe will slow growth but the Chinese government will be spending over US$586 billion over the next 2 years to stimulate the economy with most going into infrastructure projects which will major consumers of energy and commodity products. Chinese stocks now trade at 12 times earnings compared to 53 times in October 2007.

Yes, China's growth will slow from over 11% in 2007 to an estimated 7.5% in 2009. The Chinese government is targetting growth of 8% which looks achievable given the stimulus package. We like Chinese stocks in the following sectors - energy, construction materials, banks, and retail products with strong franchiese.