There seemed to be two common characteristics in many of these situations. The country either had its currency under a managed float against the dollar, or the currency was pegged to the dollar. Once the crisis started currency values plummeted despite heroic measures by many of the countries to defend their currencies. This generally resulted in a loss of confidence, sometimes for the entire region, and curtailed international capital flows with the overall result of recessions that sometimes lasted for years. Eventually countries recovered after massive bailouts by the IMF, or in the case of Mexico by the US, and as trade balances normalised and currency values stabilised.
However, with more transparency and their absorption into world organisations such as the IMF and the WTO, recent trends clearly indicate that emerging countries now have much stronger economic fundamentals than at any time in the recent past. In most cases their currency regimes are transparent and freely floating and their debt levels are low – much lower in fact than most advanced nations of today.
In the exhibit below you will find some of the ratios in 2013, as well as what those ratios were in the crisis years for these countries.
Often the past is by no means indicative of what to expect of these countries in the future. Ideally policy makers in these regions would have learned from past mistakes. However, at the very least, risks may not come up in the future in the exact ways that they did in the past. Before investing in these regions it is important to understand all the risks in order that you can appropriately adjust for the great opportunities that lie ahead.
Acknowledgements
This book is not likely to have seen the light of day without the help of some very selfless and dedicated people who encouraged me from the initial idea to the last paragraph. Among those are of course my family and my colleagues at Peak Financial Management. But there were others who spent hours on painstaking research and sorting through facts and creating coherence. First and foremost among these is my friend Vikram Kondur, CFA who spent hundreds of hours looking through the data and helping me get the story of these 18 emerging markets on paper. Even though Vikram was moving from the US to India after finishing his MBA at Babson College in Wellesley Massachusetts, he doggedly continued the grind with stubborn enthusiasm until the book was finished. My very sincere thanks to Vikram.
The other people involved in this project also worked long hours, mostly after their day jobs. James Sichenzia is single-handedly responsible for creating most of the charts in the book from streams of data collected with great patience on all of the 18 countries.
Neel Tiku was extremely diligent in helping research the investment portion of the book and in addition provided very helpful critique along the way.
Dennis Lagace was very helpful in providing valuable information as well as charts and graphs for the comparison of countries portion of the book.
My sincere thanks to James, Neel and Dennis.
My thanks are also due to Monica Carbone who helped me with researching the historic and economic backgrounds of many of the countries covered in the book.
Ken Lizotte, a great friend, who helped me in my last book was also very helpful in researching some historical facts presented as a background in the introduction to countries that are covered in the book and also in the initial contacts with our publisher Harriman House.
My very sincere thanks to Myles Hunt at Harriman House who saw value in publishing this work on emerging markets and for his valuable insight. I owe a great deal of personal gratitude to my editor at Harriman House, Craig Pearce, who read the manuscript word by word several times and offered innumerable suggestions which all made the book a lot better for the readers. Thank you Myles and Craig.
At the end I am more than grateful to all the above for helping me to finish this project but want to emphatically express my that any limitations and errors in the book are my own and are not in any way due to the advice and help I received from those listed here.
Introduction
The term emerging markets first gained traction in 1980, as a small group of investors began broadening their search for more profitable opportunities around the world. By then, the stigma attached to many of these countries – of overpopulation, poverty, corruption and so on – had begun to diminish, and it was soon recognised that these economies were becoming vibrant thanks in large part to natural resources, cheap labour, and large populations.
There have always been emerging markets. The United States, for most of its early existence, was considered an emerging market, as were countries such as Japan after the second world war. Based on the historical trend, the implication is quite clear: yesterday’s emerging markets are likely to enter the mainstream tomorrow. This creates an extraordinary opportunity for those investors who stray off the beaten path, away from the well-known, established (sometimes also called developed) and familiar markets. This book is an attempt to familiarise the reader with countries that are not a staple of daily investment conversation, but that are likely to become critical in the next phase of globalisation.
Today’s emerging markets entered the consciousness of many investors in the 1990s. By that time China had already created growth on an unprecedented scale for almost a decade and a similar trend was showing in India as it started to open up its economy in 1991. Brazil, home to a wealth of natural resources, along with Russia and its massive energy reserves, also began to make headlines and capture the attention of many investors. But the love affair with emerging markets tends to be fleeting for many domestic investors – sometimes it is based on the sentiment surrounding the politics of these countries, which can be unstable, and sometimes it is based on the ever-changing economic data. However, many times it is just that these opportunities are sought during the brief periods when there is a lack of opportunity in domestic markets.
This book analyses many of the world’s emerging markets using both short-term and long-term data and provides readers with a longer-term investment case. It demonstrates that emerging markets deserve a place in many investment portfolios, as studies continue to show that most portfolios are seriously underinvested in this area.
Portfolios that are globally diversified and include emerging markets will benefit from diversification and are also likely to achieve above average risk adjusted performance over a longer period of time, despite the short-term volatility experienced by many emerging markets.
The great global recession – emerging markets suffer and recover
The global recession of late 2008 to early 2009 proved to be a turning point. As the United States, Europe and Japan suffered through a banking and debt crisis – to the point of near collapse – emerging markets suffered in tandem. This downturn occurred despite the fact that most emerging markets did not have banking or debt related problems – and as a matter of fact many emerging markets never went into recession. What happened was that investors (ready to avoid risk at all cost) implicated emerging markets by association, and exited any investments they considered risky. In the atmosphere of utter panic, people were in no mood to ask questions. Rather, they were interested in shooting down anything that did not meet their standard of absolute safety.
Yet it was in the aftermath of the recession that the economic strength of these regions was defined. While the US stock markets recovered some of the lost value in the subsequent year (2010), emerging markets came back even stronger. Such volatility based on sentiment and money flows is a part of the story of emerging market performance.
The credibility of emerging market nations – both in political and economic