As recently as March 9, the U.S. stock market had fallen to 12-year lows on fears of a looming global depression. But what a difference two months makes. With yesterday’s gain, the S&P 500 has soared 34.1% in 39 trading days, its steepest gain over that many days since 1933. Yet, even after soaring 9.4% in April — its best month since 1938 — the S&P 500 is still up only 0.4% for 2009. The bottom line? If you’ve only been investing in the U.S. stock market, you’re probably not much better off than you were on New Year’s Eve.
Meanwhile, the performance of emerging markets has put the U.S. stock market to shame. After eight straight weeks of gains and the strongest April since December 1993, the MSCI Emerging Markets Index is now up by 23.41% for the year. Advancing in 28 out of the last 39 trading sessions, the MSCI Emerging Markets Index now stands at a seven month high.
Take the time to look beyond U.S. borders, and you’ll find that all ten of top 10 best-performing stock markets in the world this year are emerging markets. The BRIC countries (Brazil, Russia, India, and China) have dramatically outperformed their developed-market counterparts. So far this year, Russia’s RTX index is up 35.8%, China’s Shanghai Composite index is up 40.6%, Brazil’s Bovespa index is up 34.2%, and India’s BSE Sensex 30 index is up 25.78%. The Taiwanese market shot up 13% over just the past two trading days — its biggest back-to-back rally in more than 18 years — on news that state-owned mainland phone company China Mobile would take a 12% stake in a Taiwanese telecom company. Other Asian markets like Indonesia and Korea are also among the top performers in 2009.
Are Emerging Markets Back? The China Card
Credit Suisse Asset Management expects that emerging markets stocks — and Asian stocks in particular — will be the world’s best performers this year. The reason? Earnings growth in Asia will rebound first as the Chinese government’s stimulus program bolsters the region’s economy. The recent signs are good. Yesterday’s CLSA Purchasing Managers Index registered expansion in China for the first time in nine months, rising from 44.8 in March to 50.1 in April. This is the fifth gain in a row and the first reading showing an expansion since last summer.
The key is the Chinese government’s $585 billion stimulus plan. The World Bank forecasts that government stimulus spending will represent three-quarters of the 6.5% GDP growth in China in 2009. China’s investment in infrastructure projects has already more than doubled compared to the first quarter a year ago. Chinese officials are motivating loyal Chinese citizens with rallying cries of jiakuai, or "build it quick." And unlike the U.S. version — "Yes, we can!" — it seems to be having a genuine impact. Construction of the $930 million Xiangshan Island Bridge began just 11 days after the Chinese government approved the project.
The impact of China’s stimulus go beyond its own borders. India’s manufacturing sector grew in April for the first time in five months. South Korea has seen exports rise for three months in a row, with April’s exports up 44% since bottoming in January. Brazil’s commodity exports to China are also now rising.
Perhaps surprisingly, the effect of China’s stimulus is making itself felt in the U.S. as well. A growing number of companies, from Caterpillar to Goodyear, stand to benefit from China’s fiscal boost. Caterpillar says its excavator sales in China have returned to record levels in recent months. Goodyear Tire & Rubber reports that tire sales are doing well in China, where auto sales hit a record in March.
Are Emerging Markets Back? The Bull Rises Again
Mark Mobius, who manages $20 billion in emerging markets for Templeton investments, argues that the new bull market in emerging markets has already begun. Market technicians would agree, with emerging markets crossing their 200-day moving averages just last week.
But as a value investor, Mobius’ arguments for emerging markets are more fundamental. Mobius argues that emerging markets are in better economic shape than their overly-indebted developed counterparts. Equally importantly, stocks are cheap. Recent strong gains notwithstanding, emerging markets trade at 1.58 times book value. That’s far below their five-year average of 2.1 times. Mobius also predicts that emerging-market stocks will "break out" into a roaring bull market at the end of the year as low interest rates and increased risk appetite make equities more attractive.
Skeptics wonder how long the current bull run can last. After all, China’s government spending does not address longer-term global imbalances, such as a high savings rate and low consumption in China’s economy. Nor does forcing Chinese banks to lend like there is no tomorrow do much for the financial sector’s balance sheets. Chinese banks lent almost $750 billion in new loans in the first quarter alone. That’s almost the entire amount the government expected for all of 2009. With banks shoving money out the door at the government’s behest, you have to wonder how many future bad loans such an effort will generate. Past experience on this front does not bode well. After the last recession, as much as 30% of loans by Chinese banks were written off. Things are hardly better elsewhere in large emerging markets. In Russia, bad loans in the banking system could hit 20%. In India, banks are reporting a 24% rise in non-performing loans.
Even if you have doubts about the fundamentals of emerging markets, it is hard to resist the siren call of eye-popping short-term returns. As consumer confidence and manufacturing data in the U.S. improve, and stock markets around the world are shrugging off some of the worst economic data in decades, this may be the best time since the dotcom collapse to invest in emerging markets. But realize that making money in emerging markets stock markets has always been as much about rising global liquidity and investors’ willingness to embrace risk as it has been about fundamentals. In emerging markets, soaring booms followed by spectacular busts have always been name of the game. Making money in emerging markets has never been hard. It’s keeping it that has always been the biggest challenge.