MSCI Emerging Markets Index Back at Pre-Lehman Highs, But for How Long?

Hong Kong SAR, China, 8 September 2009. If you are an emerging markets investor, you may be forgiven for asking ‘Financial Crisis? What Financial Crisis?’ – because emerging market stocks are now back at pre-crisis, pre-Lehman collapse levels. Whether this level is sustainable is an altogether different question.[br]

Hong Kong SAR, China, 8 September 2009. If you are an emerging markets investor, you may be forgiven for asking ‘Financial Crisis? What Financial Crisis?’ – because emerging market stocks are now back at pre-crisis, pre-Lehman collapse levels. Whether this level is sustainable is an altogether different question.[br]

The MSCI Benchmark Emerging Markets Index, or .MSCIEF, is up approximately 1.1 per cent at the close of most Asian bourses today. This is its highest level since 9 September 2008, one year ago tomorrow, and a few days before Lehman Brothers collapsed, sending world stock markets tumbling.

India has been a strong performer, reaching a 15-month high in the Sensex yesterday. China’s Shanghai Composite Index has had five straight days of gains, growing 8 per cent in that period. This is the largest continuous gain for six months. It is, however, down 17 per cent from its 4 August peak, on continuing concerns that the government is reining in bank lending. Brazilian and Russian stock markets are also advancing.

Emerging Markets have been leading the MSCI World Stocks Index higher. They are up around 0.7 per cent for the day, close to their 25 August 2009 recent peak. World markets are up 62 per cent since their March lows, and emerging markets up a frankly astonishing 85 per cent.[br]

There are a couple of bigger picture factors at play at the moment. The G20 summit on the weekend re-assured markets that stimulus packages will stay in place for the time being. Governments are currently propping up most major economies. Stimulus measures are therefore vital until private consumption can resume its traditional role as the driver of demand.

There is also a sense that investors are shifting more of their portfolios into emerging markets before the end of the year. “Forecasts from the IMF, OECD and our analyses all point to improving GDP outlook for 2010,” said EconomyWatch.com Chief Analyst Hosni Afleck. “We are therefore seeing increasing allocations back into equities. Furthermore, growth forecasts are much more robust for emerging markets, so portfolios are also being re-weighted towards emerging markets. We are seeing the BRIC countries play increasingly central portfolio roles, while the new emerging-emerging markets, such as those in Africa, the Middle East and Central Asia, are coming into play for higher risk-reward appetites.”

Can this last? Although there might be short-term bumps, the overall trend is positive. Dr Afleck said that “as EconomyWatch.com has shown, September is historically the worst month for stocks. Having risen so fast this year, we would expect a pull-back at some point before the end of the year. Medium to long term, there is clearly a lot of fundamental growth to come in Emerging Markets, both the giants and the new kids on the block, so it does make sense to increase the emphasis here, and reduce dependence on the weak western markets.”

Juan Abdel Nasser, EconomyWatch.com