The Undeniable Wealth Potential of Emerging Markets

A cool breeze blew in over our little island late this afternoon. The temperature is forecast to drop from a high of 90 degrees today to only 60 tomorrow. How quickly things can change…

But we’re here to talk markets… If you took Friday off, you didn’t miss much. The Dow nudged higher by a fraction of a percent. The NASDAQ and the S&P 500 remained, for all intents and purposes, unchanged. Gold slipped a bit over the past few days. After a failed run at $1,120 per ounce on Friday, ol’ yella fell back to around $1,100. This morning it trades a few bucks higher. Oil holds steady at $80 and change per barrel.

Here in Asia, indexes mostly declined overnight. Hong Kong’s Hang Seng ended the session half a percent down. Measures in China and Taiwan fell around 1.5%. Japan’s Nikkei 225 was flat.

All in all, it has been a comparatively underwhelming few days for traders. Investors, on the other hand, have plenty to think about. Those looking to protect and grow their wealth over the long haul have to factor in longer term trends, the kind that remain impervious to cool afternoon breezes.

One such trend is the gradual ceding of global economic control by the world’s last remaining superpower. Depending on whom you ask, this trend probably began sometime between the mid nineties and the early “naughts” – a term some commentators have taken to calling the first decade of the third millennium. The word “naughts” is actually not a bad name for the period. Taken literally, it means nothingness, or nonexistence. Certainly, from a stock market perspective, the decade has been a veritable cipher…a zero. The Dow Jones Industrial Average, for example, began the decade a few points shy of 11,500, almost a thousand points above where it sits today. After factoring in inflation and, for managed accounts, fees, commissions and myriad other charges, most investors in US stocks would be happy to have achieved a zero return on their money over the past ten years.

Meanwhile, many of the world’s emerging markets have provided investors with some very handsome, money multiplying years.

India’s Sensex 30 Index, for instance, more than tripled over the past decade. From around 5,000 back on January 1, 2000, the measure of India’s 30 bluest chip companies now hovers just above 17,000. Brazil’s Bovespa has similarly outpaced the more mature US markets. Kicking off the new millennium a shade above 16,000 points, South America’s largest index is today bumping up against the 70,000-point mark. South Korea’s Kospi has more than doubled during the same time. Argentina’s Merval bolted from around 500 points to nearly 2,500 today…the list goes on…

Although the intraday volatility is typically higher in emerging markets, it is clear that these developing countries have more than just a gentle breeze at their backs. Gone are the days, therefore, when an investor could afford to simply dismiss out of hand the wealth generating potential of emerging markets. The 50-year old investor who chose to allocate even a small portion of his capital to any of the above-mentioned markets at the beginning of the decade is undoubtedly in a superior position to one who stuck to the US majors only.

Of course, physical capital is not the only factor to consider when assessing the relative strength or weakness of a nation’s overall international standing. One must also reckon with currency fluctuations, political stability and the prospect of future economic growth, among a host of other contemplations. And, perhaps most important of all, one must be mindful of the in- and out-flow of a nation’s most valuable asset: it’s human capital.

Over in the US of A, the intellectual capital is certainly flowing. Unfortunately, though, it appears to be flowing in the wrong direction…

Joel Bowman
for The Daily Reckoning