Investors poured a record $26.5 billion into developing nation stock funds in the second quarter, with China receiving $3.8 billion
Developing countries’ share of worldwide equity value climbed to a record as the fastest-growing economies lured investors amid the first global recession since World War II.
The 22 nations classified as “emerging” by index provider MSCI Inc comprised 24 percent of world market capitalisation, up from 18 percent at the start of this year, the highest proportion since Bloomberg began compiling the data in 2003. China’s market capitalisation surpassed $3 trillion on Thursday for the first time since August, from $1.8 trillion at the end of 2008.
The increase signals growing confidence in developing countries as equity investors, spurred by interest-rate cuts and stimulus plans, redeploy cash after the worst US losses since the Great Depression. The MSCI Emerging Markets Index rose 35 percent, beating a 2.9 percent advance in the MSCI World Index Index of developed economies and lifting the value of stocks to $8.6 trillion from $5.1 trillion in 2008.
“Everyone is trying to jump on that bandwagon,” said Nicholas Field, who helps manage about $11 billion in emerging-market stocks at Schroders Plc in London. “There are projects in emerging markets in which I can make more money than I can in the West at the moment.”
Developing economies will probably expand 1.6 percent as a group this year and 4 percent in 2010, according to the Washington-based International Monetary Fund. Developed nations will contract 3.8 percent in 2009 and have zero growth next year, the IMF forecast in its April World Economic Outlook report.
China stimulus
Investors poured a record $26.5 billion into developing nation stock funds in the second quarter, with China receiving $3.8 billion, according to data released yesterday by EPFR Global. The funds overall attracted $972 million in the week ended July 1, resuming net inflows after the first decline since March the previous week, the Cambridge, Massachusetts-based research firm said. China’s market capitalisation has jumped more than fivefold from about $500 billion at the end of 2003, according to Bloomberg data that includes common and preferred stock. The Chinese economy more than doubled in that time to $3.8 trillion, according to the World Bank.
The world’s third-largest economy after the US and Japan has been boosted by a 4 trillion-yuan ($585 billion) stimulus package and five reductions to the key one-year lending rate in the last four months of 2008. The Shanghai Stock Exchange Composite Index rose 70 percent this year.
Recovery
Investors should buy emerging-market equities rather than European stocks to benefit from China’s stimulus measures and a rally in commodities, Fortis Investments strategists Joost van Leenders said adding to his already “overweight” position in developing economies. Fortis manages about $240 billion.
The Reuters/Jefferies CRB Index of 19 raw materials rose 13 percent in the three months to June 30 after falling for three quarters.
It plunged a record 54 percent in 2008 as the financial crisis, which started with the collapse of the US property market in 2007, triggered more than $1.47 trillion of losses at financial institutions worldwide and led to the seizure of global credit markets.
$75 billion bailout
Some $67 billion was pulled out of emerging-market equities and bond funds in 2008, EPFR data shows. Investors returned to become net buyers of emerging-market stocks this year on government stimulus plans, interest-rate cuts and the potential of as much as $750 billion in International Monetary Fund support.
“A lot of emerging economies came into this credit crisis with a strong build-up of reserves and they are better able to create economic stimuli from savings, rather than from borrowed money like the developed markets,” said Hugh Hunter, head of global emerging markets at Blackfriars Asset Management in London, who manages $1.5 billion. “This will lead to significant outperformance of emerging markets.” The IMF has so far pledged more than $75 billion to bail out economies hurt by a lack of credit and plunging exports. Romania, Hungary and Ukraine got a combined $50 billion in aid.
All 10 of the world’s best-performing indexes in the second quarter are developing markets, led by Ukraine, Vietnam and Kazakhstan, according to data tracked by Bloomberg.
Capital kickback
“You have to remember how much emerging-markets fell and how much capital was withdrawn last year, so some of it is a kickback from that,” Schroders’ Field said.
Brazil, the world’s eighth-largest economy, has reduced taxes and cut the benchmark interest rate at all four policy meetings this year in a bid to help Latin America’s largest economy recover. The market capitalisation of the nation’s shares reached a year-high of $952 billion last month and was at $920 billion yesterday, Bloomberg data show.
The Reserve Bank of India, the central bank for the fourth-biggest emerging economy, reduced borrowing costs six times in seven months and the government announced three stimulus packages comprising about 7 percent of gross domestic product. The market capitalisation of Indian equities is at $989 billion after reaching a 10-month high $1 trillion last month.
Russia’s government has allocated $81 billion in stimulus spending this year on loans, state aid and subsidies to battle an economic contraction of 10.2 percent in the first five months of the year, when industrial production slumped a record 17.1 percent in May.
The country’s Micex Index last month became the world’s first benchmark equity index to enter a bear market since global stocks began rallying in March, tumbling more than 20 percent from a June 1 peak. The Micex dropped 2 percent today to an eight-day low. Russia’s shares have a market capitalisation of $339 billion. The annual gross domestic product of India and Brazil have more than doubled since 2003, while Russia’s economy has more than tripled to $1.6 trillion.
The authors are Bloomberg News columnists. The opinion expressed are their own
