In 2009, emerging markets flew higher than a frigate bird, with the MSCI Emerging Markets Index returning 74.5 percent. Latin America, the top performer among MSCI’s developing-market indexes, returned nearly 98 percent.
Higher car sales may be a harbinger of prospects for China, now considered the world’s largest auto market as it moves to a more consumer-based economy.
As investors scurried to cash in, emerging-market mutual funds swelled, attracting more than $80 billion in new money, according to EPFR Global, a tracker of market data in Cambridge, Mass. That was the highest annual inflow since EPFR began keeping track, beating the previous record by more than $25 billion.
Those kinds of numbers, at a time when economies in the United States, Europe and Japan are ailing, have raised the possibility that emerging markets are surging toward an investment bubble.
“A lot of the emerging markets have bounced back strongly from last fall and now look a little on the expensive side,” said John R. Chisholm, co-manager of the Acadian Emerging Markets fund. Mr. Chisholm’s fund, which invests throughout the developing world, had a total return of 77 percent last year.
Emerging-market stocks have long been among the most volatile investments, zigzagging more, on average, than developed-market shares. In 2008, when the Standard & Poor’s 500 index dropped 38.5 percent, the MSCI Emerging Markets Index fell 54 percent.
Returns in developing markets have regularly been sapped by crises, like the Mexican peso devaluation in 1994 and the Asian financial flu in 1997. The announcement in November that Dubai would delay repayment of some of its debts raised the possibility of yet another round of woe.
Because of the possibility of future blow-ups like these, advisers have long said that average investors should put only a small portion of their assets, if any, into emerging markets. Yet some investment professionals have begun to question whether today’s developing world is really as risky as its reputation — and to suggest that less sophisticated investors might consider putting more of their money there.
Jim O’Neill, head of global economic research at Goldman Sachs, is among the best-known proponents of that view. In 2001, Mr. O’Neill coined the acronym “BRIC” as shorthand for the four largest economies in the developing world: Brazil, Russia, India and China. He argues that these countries, with hefty populations and solid economic fundamentals, should outpace the developed world over the next several decades.
“Because of the financial crisis, some people started to believe the BRIC thing was finished,” Mr. O’Neill said. “I’d argue that three of the four — especially China, but also Brazil and India — have demonstrated that they can live without U.S. growth leadership.”
Those three have resumed strong growth, despite the struggles in the developed world. Russia has lagged because of dependence on oil and gas, whose prices fell sharply with the recession. “It’s easy to dismiss Russia after oil prices lost 75 percent of their value in six months,” Mr. O’Neill said. “Let’s see later this year how they’re doing.”
The overall recent performance of emerging markets has led Jeremy J. Siegel, a finance professor at the Wharton School of University of Pennsylvania, to conclude that they may be a better deal today than just a few years ago. “They’ve weathered a severe shock very well,” he said. Thus, investors aren’t foolish to buy the shares, even after the recent rapid price rise, he said.
The average price-to-earnings multiple for Chinese listings, for example, was in the low 20s in late 2009 and was projected to be 18 or 19 this year, he said. “That’s not cheap, but it’s not crazy for a rapidly growing country,” he said. “It’s not the 50 of 2007, when I was saying don’t go in there.”
Edmund J. Harriss, investment director at Guinness Atkinson in London, pointed to car sales as a harbinger of prospects for China and other big emerging markets. He said China would probably report 12 million sales for 2009, beating the United States by two million. “The size of the emerging economies is reaching a stage where they can sustain big growth in personal consumption,” he said. “If you get that, you should be looking to invest. That’s what drove America from the 1950s onward.”
Mr. Harriss oversees three Guinness Atkinson funds. The largest, the China & Hong Kong fund, had a total return of 92 percent last year. Among its biggest holdings at midyear were China Mobile, a telecom, and the China National Offshore Oil Corporation.
Even proponents caution that emerging markets, despite their promise, remain risky. If a big crisis arises — perhaps widespread political unrest in China — it could sow broader panic, with investors fleeing as fast as they piled in. “Be aware that you can easily lose half of your investment in a few months,” said Mr. Chisholm of Acadian.
Risk is the reason that Towers Perrin, the employee-benefits consultant, often steers retirement plan managers away from including emerging-markets funds in 401(k) plans, said Darrell S. Zechman, a consultant in its Chicago office.
Many Americans don’t understand that investments in markets outside the United States entail currency and political risk along with the usual stock-market zigzags, he said. Such investors may also time investments poorly. “Traditionally, this is an asset class where people chase returns — they read in the news about a huge run-up and dump a lot of money in just before the market turns,” he said. “They get in at the peak and ride down to the trough.”
Towers Perrin typically suggests that retirement plans offer broad-based international funds, which can invest in any market outside the United States but keep most of their money in developed ones, Mr. Zechman said.
INVESTORS considering emerging markets might also want to ponder bird dung. Both bird droppings — specifically, guano deposited on Peruvian islands — and financial assets have produced speculative frenzies, said Kenneth S. Rogoff, an economics professor at Harvard and an author of a recent book on financial crises.
In the 1800s, foreigners became enchanted with guano’s promise as a fertilizer and scooped up Peruvian bonds, Professor Rogoff said. Soon enough, the boom went bust, and Peru defaulted on its debt, wiping out the investors.
“It’s comical from a 21st-century perspective,” he said. “But guano was a huge technological advance for farming at the time.”
