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Bulls Still Running in Emerging Markets
Earnings Ascension Continues Optimism
By Rob Hall, Portfolio Manager
Russell Investment Group
Global Leaders in Multi-Manager Investing
The following article has been issued by our parent Frank Russell Company in Tacoma, Washington
Emerging markets ended last year with a flourish, out-performing developed markets during 2004 with a return of 25.9%, as measured by the MSCI Emerging Markets Index. Developed non-US markets returned 20.7% as measured by the MSCI World Index.
The devastating tsunami that affected much of South Asia in late December had little impact on the markets of the affected countries, the exception being the small market of Sri Lanka, which lost 10% of its value in the last week of the quarter. Investors expect rebuilding and infrastructure-driven growth to counteract the impact of the tsunami in the near-term.
Even though they gained more strongly than the markets in the developed countries last year, emerging markets may still be trading at a discount to them. The reason is that the underlying fundamentals of emerging markets have been strong over this period and earnings have risen strongly.
Some investment managers talk of emerging markets being on a seven-year cycle, the midway point of which was 2001. If this cycle is real, emerging markets can be expected to slow during 2005. Other factors also could cause the markets to slow and the lead over developed markets to shrink. Among them are rising interest rates in the US, slower economic growth, including a hard landing in China, and slower earnings growth.
Other managers believe upside remains in the emerging markets. Indeed, some show optimism toward emerging markets and are overweighting the asset class. Few money managers can see high country-specific risk in the larger emerging markets countries and contagion is believed to be in the past.
But all bets are off when it comes to reaction to extreme environments, such as terrorist attacks. The emerging markets may lose ground quickly should a reduction in global risk tolerance be seen.
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
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