In the past three years, shares of Western companies which worked hard on emerging market opportunities have outperformed those of peers that preferred to focus on the developed world.
The 300 companies in the 1607-stock MSCI World index which derive the biggest proportion of their total revenues from emerging markets rallied by a third more than the broader index between 2009 and mid-August this year. For much of that time, Western economies, particularly in Europe, struggled while emerging economies powered forward. Now, while developed economies are faring better, the outlook for emerging economies looks even less rosy than it did in July, when the International Monetary Fund cut its forecasts of how much they would grow this year and next.
Expectation that the Federal Reserve will scale back its quantitative easing programme has increased the flow of international money out of emerging markets, causing currencies in these regions to weaken. The sharpest falls have been seen in countries with big current account deficits, which depend on foreign capital inflows. Several central banks have intervened to slow the slide in the value of their currencies, and Brazil and Indonesia raised interest rates last week. Consumers in emerging markets will have to pay more for foreign imports as their currencies weaken and will be less inclined to borrow to finance big-ticket purchases if credit conditions are tightening.
Of course, not all emerging market central banks will raise interest rates and not all emerging economies are embattled. Also, it would be short-sighted, to say the least, if Western companies reversed their emerging market strategies at the first sign of trouble. But anything that squeezes consumers in emerging markets will squeeze the share price of Western firms that pinned their hopes on them. Developed equity markets, meanwhile, trade at a premium. The Thomson Reuters Global Index trades on a forward p/e of 13, while the emerging market equivalent is 10.3, according to Starmine. The higher value may gloss over the fact that steam could leak from developed world stocks because emerging markets are in the cooler.
The 300 companies in the 1607-stock MSCI World index which derive the biggest proportion of their total revenues from emerging markets rallied by a third more than the broader index between 2009 and mid-August this year. For much of that time, Western economies, particularly in Europe, struggled while emerging economies powered forward. Now, while developed economies are faring better, the outlook for emerging economies looks even less rosy than it did in July, when the International Monetary Fund cut its forecasts of how much they would grow this year and next.
Expectation that the Federal Reserve will scale back its quantitative easing programme has increased the flow of international money out of emerging markets, causing currencies in these regions to weaken. The sharpest falls have been seen in countries with big current account deficits, which depend on foreign capital inflows. Several central banks have intervened to slow the slide in the value of their currencies, and Brazil and Indonesia raised interest rates last week. Consumers in emerging markets will have to pay more for foreign imports as their currencies weaken and will be less inclined to borrow to finance big-ticket purchases if credit conditions are tightening.
Of course, not all emerging market central banks will raise interest rates and not all emerging economies are embattled. Also, it would be short-sighted, to say the least, if Western companies reversed their emerging market strategies at the first sign of trouble. But anything that squeezes consumers in emerging markets will squeeze the share price of Western firms that pinned their hopes on them. Developed equity markets, meanwhile, trade at a premium. The Thomson Reuters Global Index trades on a forward p/e of 13, while the emerging market equivalent is 10.3, according to Starmine. The higher value may gloss over the fact that steam could leak from developed world stocks because emerging markets are in the cooler.