Emerging markets: will ye no come back again?
Underperformance is still the norm in emerging markets.
Since the end of 1994, emerging market equities have underperformed those of developed markets. That underperformance began with the collapse of the Mexican peso and continued with the end of the Asian miracle in 1997-98, the debt default of the Russian government in August 1998 and the destruction of the Brazilian currency peg in January 1999.
Since we last analysed the prospects for emerging markets in Euromoney (in September 1999), the sorry story has continued with the first default on a Brady bond by Ecuador and its subsequent dollarization, the collapse of the Turkish lira peg (again) and now the impending debt default and possible currency devaluation of one of the largest emerging market debtors and one of the last currency pegged-economies, Argentina.
Will this underperformance continue? That depends on three fundamental factors. The first is the willingness of global investors to plough increased long-term capital into emerging economies. That willingness depends on the return on investment which global corporations can expect from their long-term commitment to relocating plant and businesses outside the OECD economies.
That, in turn, depends on the second factor - the structural improvements made in emerging economies that can sustain high long-term growth.