The Emerging Markets Investor

Assuming current trends, the global annual growth rate of consumption of primary energy will nearly double this coming decade to 1.9%, compared to 1% over the past decade. This is solely because the slow-growing econ...

That economic activity is transformed energy is a truism. Technological innovations, allowing the harnessing of wind, water, coal, oil, nuclear, and solar power, were the driving force behind the Industrial Revolution since the 18th century. Yet,...

Recent decades have brought impressive gains in prosperity for many developing countries. By attracting investment and opening up to the world, many countries have been able to grow more quickly than rich countries that operate at the techn...

The earnings crunch suffered by emerging markets over the past decade ( EM has an Earnings Problem ) has been the cause of the dramatic underperformance of the asset class relative to U.S. stocks. Poor EM earnings have resulted from...

Emerging market stocks are once again proving to be disappointing in 2023 due to increasing risk aversion. Rising interest rates, concerns about a global recession, and weak earnings in many countries are all contributing to bleak short-term prospects. Investors can only find comfort in the expectation of longer-term returns.

The past decade has been a disaster for investors in emerging markets because nominal earnings measured in dollars have not grown. The fall in earnings and investor returns can be seen as a bearish cyclical adjustment after the prior decade of plenty. India stands out as the star performer over this period, as it has provided high earnings growth without the volatility of commodity producers.

The world’s most prominent central banks operating in the largest and most liquid financial markets have successfully implemented financial repression policies. Negative interest rates over the past three years averaging -3% have reduced the U.K.”s total debt to GDP ratio by a whopping 71%.

China has made itself the dominant force in the automotive industry over the past two decades. It has achieved this supremacy at a time when the industry is undergoing the most significant technological shift in 70 years. China’s dominance of this critical industry may increasingly be seen by many countries as an unacceptable strategic and security threat.

China’s economy has experienced a multi-decade period of high growth, similar to “miracle” surges previously witnessed by other countries. Today’s wealthy nations once went through these surges as well: the U.K., the U.S....

The IMD business school in Lausanne, Switzerland conducts a survey annually to measure how well governments “provide an environment characterized by efficient infrastructures, institutions, and policies that encourage sustainable value creation by enterprises” This survey is particularly significant because previous efforts by the World Bank and the World Economic Forum (World Competitiveness Report) have been abandoned.

As an economy begins to modernize, labor productivity will be high and investors can deploy capital with high returns. As rural migration accelerates and more capital is deployed, countries experience stages of “miracle” growth when both labor and capital productivity are high. Eventually, a country achieves a significant degree of integration into the modern global capitalistic economy. At this time, labor becomes scarce and capital returns muted. Mature economies come to rely for growth mainly on the expansion of consumer services and hard-to-achieve technological innovation.

As countries develop, they follow a process of gradual absorption of both labor and capital into the “modern” economy. This model of development was described in Walter Rostow’s book The Stages of Development (1960) The process is driven by the migration of labor from rural to urban locations. The five stages are detailed below.

During the 2002-2012 decade, the S&P500 underperformed the MSCI EM Index and every major country in the index. Only tech-heavy Taiwan and India managed positive returns over this period. Earnings growth in dollars for most EM countries were extraordinarily good between 2002 and 2012 and dismal in the 2012-June 2023 period.

The performance of EM stocks relative to the S&P 500 can be seen as a tale of two decades. Most of this performance can be explained by changes in valuation as measured by price-earnings and CAPE ratios. The recent rise in interest rates and the prospect of rising U.S. debt and fiscal deficits point to a cyclical reversion of these trends in the coming decade.

Emerging market stocks once again are lagging U.S. stocks in 2023, as they have consistently over the past decade, rising by 3.5% during the first semester compared to 16.8% for the U.S. market. The strength of U.S. stocks can be attributed to the r...

Historically, the most effective manner to reduce excess debts held by the government and the public at large has been to inflate it away. Financial repression consists of imposing negative real returns on the holders of fixed income securities by allowing inflation to be higher than interest rates. This can be done either through Central Bank monetary policy or by regulators forcing financial agents to hold unattractive securities.

Since 1980, Brazil has gone from being the prominent industrial nation in the developed world to a minor player undergoing large-scale deindustrialization. Unlike the successful economies of Asia and Easter Europe, since the 1980s Brazil’s industrial policy has been inward looking and aimed directly at achieving social objectives instead of economic results.

Andres Manuel Lopes Obrador (AMLO) is presiding over the country’s best financial markets in years. AMLO can be credited for a sound fiscal policy and for letting the orthodox Central Bank do it's job. The main cause for market enthusiasm seems to the hope that Mexico will be a major beneficiary of “friend-shoring” investments.

During my freshman year in college in 1976, I took a class on development of the “Third World” which highlighted Brazil’s “economic miracle” and its rise as a leading economic power. That same year, the renowned MI...

Rich countries have complex economies, and poor countries get richer by increasing the technological content of what they produce. This requires many things, such as good institutions (e.g., law and order, property rights) as well as an educated population. The Atlas of Economic Complexity (AEI) provides insight into the progress countries are making towards increasing their innovative capacity.

All signs point to an imminent recession in the U.S. and the return of deflationary forces. Commodity prices are leading the way in this deflationary push. Emerging market assets are not likely to do well at this time. Investors should keep their powder dry for the beginning of a new cycle in 2024.

Brazil has suffered two severe bouts of “Dutch Disease.” The first during the commodity boom of the 1970s which was followed by the bust of the 1980s and a “lost decade” of economic stagnation. The second, during the 2001-2012 commodity super-cycle driven by China’s “economic miracle, which was also followed by a long economic depression.

As the world moves away from the globalization of manufacturing value chains and finance, the protection of domestic markets is back in favor with policy makers. The new mercantilists will have to overcome high costs, including overvalued currencies. The U.S., on the other hand, has long favored consumers over manufacturers, and has an overvalued currency.

Brazil's new government has ambitious plans to relaunch the economy through an active promoter-state. However, Lula’s main problem is that his Labor Party lacks credibility. The core of any economic strategy has to be to improve the income of the mass of Brazilians that currently barely participate in the productive economy.

The model of development followed by most developing countries has been to move up the value chain of manufactured goods. This model worked well for many of the current middle income emerging market countries. But the neoliberal revolution of the 1980s spawned the ‘Washington Consensus’ for free trade and capital movements.