Emerging markets to recover soon

At least according to Mark Bobius. And actually, not that soon, but “within 14 months.” We sort of agree. More often than not, financial crisis originate in emerging markets (Thailand in 1996, Russia in 1998, etc.), but this time around, it’s completely ‘made in the developed world’.

But emerging markets are to be affected in a couple of ways:

  1. When the developed world enters a recession, it takes away a lot of export possibilities. China is already facing quite a slowdown in it’s exports. For commodity exporters, the dangers are even bigger as these are way more price elastic, leading to some sharp falls already
  2. Emerging markets are usually perceived as more risky, and money invested there is often repatriated to cover for losses at home
  3. However, the measures taken to combat the financial crisis, especially lower interest rates, have a positive effect on emerging markets, which often link their currencies to those of developed economies and hence import the more expansive monetary conditions. China is already embarking on stimuli (both monetary and fiscal) of their own.

Here is what Mobius had to say:

Mobius: Emerging Markets Recovery Within 14 Months
Wednesday, October 1, 2008 11:27 AM

  • Mark Mobius, executive chairman of Templeton Asset Management, says emerging stock markets should rebound soon, as economies in those markets are largely unaffected by the U.S. financial crisis.
  • Bear markets generally do not last more than 14 months in the emerging market arena,” Mobius said in a question-and-answer session on FT.com.
  • “We therefore believe that the markets will price in the relative absence of credit crisis risk [in Brazil, Russia, India and China] within that time period. This should also be true for other emerging markets.”
  • In the short term, emerging markets aren’t immune from the woes afflicting their more developed brethren, Mobius acknowledges.
  • That’s because capital is flowing around the world faster and in greater amounts than ever before, he says.
  • In addition, the explosion of world trade in recent years has tied emerging and developed markets together.
  • The MSCI Emerging Markets stock index dropped 23 percent in the first eight months of the year.
  • But that shouldn’t last, Mobius argues.
  • “Emerging markets may react in the short term to something happening in the United States, but within a short period of time, local influences will take precedence.”
  • Mobius notes that emerging markets outperformed developed ones in recent years. The MSCI Emerging Markets index surged an annualized 25 percent in the five years through August, compared to a 7 percent gain for G-7 markets.
  • To be sure, if the United States fails to adopt a bank bailout package, emerging economies may experience a “significant slowdown,” as U.S. demand for imports from these economies slows, Benjamin Tal, senior economist at CIBC World Markets, told The Toronto Globe & Mail.

And note, the bear market in China is already 12 months underway. Two more months to go…