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Until
2002, stock market invest ments in the emerging markets have
destroyed the value for they underperformed to S&P index.
However, in the current economic boom, the capital flows into
emerging market equities are at record levels and bond prices
are at an all-time high. As the emerging markets are increasingly
becoming the growth centers of the global economy, bonds and
equities in the developed markets are losing their sheen.
Global investors are facing the reduced risk while investing
in the emerging markets. Nevertheless, taking cue from history,
investment in the emerging markets is dauntings, whether
it is structural or cyclical.
The
emerging markets have seen several downturns in the aftermath
of the 1994 Mexico crisis, the 1997 Asian crisis and the 1998
Russian crisis. However, all these crises have been followed
by investment booms and have exposed their vulnerability of
these countries from emerging economies to another country's
woes, and drop in global liquidity. During the 2003-05 period,
emerging market stock indicies increased by 165%. According
to the estimates, emerging market stocks are still trading
at 24% discount to the MSCI world index on a forward earnings
basis despite their recent rally.
The
increasing number of pension funds, hedge funds and retail
investors are pumping the huge capital into emerging markets.
Net inflows to the emerging market equity funds were at $20.3
bn in 2005, which is five times higher than to 2004. Surprisingly,
the net inflows have touched $11.4 bn in January 2006, more
than half of last year's entire inflows. While net inflows
to bond funds are $10.3 bn the present investment wave is
being carried out by the international pension funds, which
are increasing their portfolio weightages in the emerging
markets. Besides, the pension funds of emerging markets are
also investing heavily in their own markets. |
