NEW DELHI — This was a lost decade for the American stock market. But for much of developing world, it was the Roaring ’00s — a period of soaring markets and breakneck investment that left even some bulls wondering if the good times can last.
While the broad American market lost about a fifth of its value in the last 10 years, emerging markets like Brazil, Russia, China and India powered ahead with gains in the double or even triple digits.
The numbers are staggering. On the Ukraine’s PFTS Stock Exchange — a Wild East of investing that did not even exist until 1997 — shares soared more than 1,350 percent over the last decade. In Peru, stocks jumped more than 660 percent. Here in India, the Sensex index leaped more than 240 percent.
To believers, those heady gains underscore profound shifts taking place in the global economy, where investment dollars, euros and yen whiz across borders and time zones with the stroke of a computer key. As many Americans wait for an economic recovery, money is pouring into the fast-growing economies of Asia and Latin America, as well as into oil-rich Russia and the former Soviet bloc.
“What we’re living through now is something of epic proportions,” said Allan Conway, the head of emerging markets equities at Schroders, the big money management company in London. He likened the economic rise of nations like Brazil, Russia, India and China — the so-called BRIC countries — to that of postwar Japan.
Amid all this euphoria, even some longtime bulls wonder if investors are getting a bit carried away. Emerging markets have a history of giddy booms and crushing busts dating back to the 19th century. They collapsed spectacularly in 1997, as a chain reaction of currency devaluations, bankruptcies and recessions rocked East Asia. In 1998, the Russian market plunged more than 80 percent after the country defaulted on its debts.
More recently, emerging markets tanked with the rest of the world in 2008, after shell-shocked money managers pulled cash from anywhere that seemed risky. But they were a bright spot in 2009 — the MSCI Emerging Markets index increased 73 percent in 2009, compared with a 25 percent jump in the S.& P. 500 index.
Despite 2009’s gains, few predict a major setback today. Since the 1998 debacle, some developing countries have cleaned up their acts, balancing their budgets and improving their trade balances. As their economies grow, domestic investors have become big supporters of these countries’ stock markets. With interest rates low around the world, companies based in emerging markets, like their counterparts in the developed world, enjoy access to cheap money. High commodities prices have buoyed stock and bond markets in nations that are big exporters of commodities.
But the recent travails of Dubai, where a debt-driven bubble economy is now bursting, provide a powerful reminder that in up-and-coming economies, what goes up can come down — and fast. That these markets have gained so much, so quickly — with some white-knuckled drops along the way — gives some investment professionals pause.
Mark Mobius, one of the deans of emerging market investing, said that while developing markets still have room to run, the first half of 2010 could be bumpy.
“We continue to see upside, but with substantial corrections along the way, which could be as much as 20 percent,” said Mr. Mobius, the executive chairman of Franklin Templeton Investments, which is based in San Mateo, Calif.
Some market specialists worry that asset bubbles akin to the one that inflated and burst in the American housing market might be growing in places like China and Hong Kong. Others fret over the risks posed by volatile commodities prices, as well as over the inevitable end of this period of ultralow interest rates.
Leon Goldfeld, the chief investment officer for HSBC Global Asset Management in Hong Kong, told reporters this month that HSBC had cut its exposure to Asian equities, anticipating a 10 percent to 15 percent decline in early 2010. After that, Mr. Goldfeld said, Asian stocks would represent a “good buying opportunity.”
As long-term investments go, emerging markets seem to have a lot going for them. On average, developing countries have less sovereign, corporate and household debt than developed countries. Their economies are also growing faster than industrialized ones. Merrill Lynch predicts that emerging market economies will grow 6.3 percent next year, while the global economy expands by 4.4 percent.
Emerging markets are eclipsing their developed peers in other ways as well. Imports to the BRIC nations are likely to surpass imports to the United States for the first time ever in 2009, according to Morgan Stanley.
For the moment, the developing world is the engine of global growth. Emerging markets accounted for virtually all of the year’s growth in global output, because developed economies shrank or were flat. Even if developed countries recover completely in 2010, emerging economies will account for 70 to 75 percent of the growth in global output “for the foreseeable future,” said Mr. Conway of Schroders.
Developing nations are also assuming a bigger role in the world economy. Morgan Stanley predicts that developing countries, including those in the Middle East, will account for 36 percent of total global gross domestic product in 2010, up from 21 percent in 1999.
All of this is a big lure to investors. Funds focused on equities in emerging markets attracted a record $75.4 billion this year, far surpassing their previous high of $54 billion in 2007, according to EPFR Global, which tracks fund flows.
Even after that influx, emerging markets still account for only a small fraction of investment portfolios in United States and Europe, the world’s money management centers. Less than 3 percent of assets managed by United States fund managers are invested in emerging markets. That number could double in the next five years, some investment experts say.
Even normally conservative investors might be tempted to jump into emerging markets, given the sluggish outlook in the United States and Europe. After a dismal decade for the American stock market, markets in the developing countries might seem attractive.
“Investors are starting to look at this asset class and realize that it is a pretty safe place,” said Kevin Daly, who manages $1.7 billion in emerging market debt at Aberdeen Asset Management.
Despite their volatile history, emerging markets strike some money managers as relatively secure places to invest. Of course, such hopes have been dashed before.