Eric Fry

Stock markets around the world delivered pleasing results yesterday. Here at home, the S&P 500 Index added nearly 1% to its recent gains, while the MSCI Emerging Markets Index added nearly three times as much…to continue a long-running trend.

No matter the time horizon – 1, 3, 5, 7 or 10 years – the Emerging Markets are trouncing their counterparts in the Developed World.

“Much has been written on the subject of emerging vs. submerging markets,” Joel Bowman observed in his essay “Working for a Living: A Report on Emerging Market Productivity”, “and with increasingly good reason. According to Goldman Sachs strategist, Timothy Moe, the market value of emerging market stocks is set to quintuple over the coming two decades, reaching some $80 trillion (with a ‘T’) by 2030. China, by this time, will have eclipsed the United States as the world’s largest market.

“Investors with an eye to the future,” Joel continued, “will want to be in the pool when the big money pours in. The ride will be rough, no doubt, but the waterline is most definitely rising. According to figures released by research firm EPFR Global, investors added money to emerging-market equity funds for a 14th straight week last week, even as they pulled $6.87 billion from global stock funds. The driver, it is clear, is the upward and ongoing growth, both registered and forecast, in emerging markets. The IMF expects the emerging economies to grow by 6.4% collectively next year, almost three times faster than developed nations which, reckons the fund, will likely dawdle along at a paltry 2.4%.”

Looking farther down the road, the IMF expects the BRIC economies to deliver fully 60% of the world’s GDP growth during the next four years – or more than five times the growth that the G7 economies will produce.

BRIC Country Market Growth

“How do the Emerging Market nations achieve such veracious growth rates?” Joel wondered aloud. “They work. Moreover, their toils are of the productive kind – making cars, toothbrushes and belt sanders – as opposed to what the west counts as productivity – counting people, writing laws and tasering grandma at the airport.

“Such a divergence in productivity is, of course, not lost on Mr. Market. Over the past decade the MSCI Emerging Markets Index has more than doubled. During the same period, the MSCI World Index of advanced nations has slumped nearly 21%. This worrying (for developed nations) trend expresses itself in entirely unsurprising forms:

Household Disposable Income

“Clearly, the winds of economic change are at the emerging markets’ backs,” Joel concluded. “The rough and tumble, dog-eat-dog capitalistic initiatives coloring the emerging nations’ economic landscape harkens back to the ‘good old days’ of the world’s developed economies; when entrepreneurial endeavourers were rewarded by the market, rather than punished by the state, when profit was a goal for which to strive in earnest, not a dirty word emblazoning the protest sign of a state-dependent layabout looking to borrow somebody else’s axe to grind.”

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • Prakash

    Dear Eric,

    The first thing we hear in any mutual fund’s prospects is that the future is different from the past. If the BRICs are growing today by exporting to the developed nations, then how is this growth to be sustained in the future when the developed nations wane? Yes, they can get some money in selling to each other, but the customer in the developing nations is an out and out value for money customer, which means lower margins for most corporations, which translates into lower share prices if we keep P/E expectations constant. Is any of this taken into account in the IMF forecasts?

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