Market Analysis

A Seemingly Cruel Mistress

China's recently roaring returns have given way to a sharp correction—a lesson in the benefits of Emerging Markets diversification.

Story Highlights:

  • The Shanghai Composite share index rose 500% over the last two years, only to see its level halved over the last five months.
  • Emerging markets are naturally volatile and often far from free.
  • Despite their wild nature, emerging markets present opportunities that can't be denied and shouldn't be missed. Just avoid getting carried away.


(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Only last year, China was the investing world's best girl, our sweetheart who could do no wrong. But like dreamy Adam Trask in Steinbeck's East of Eden, booming markets skew our assessment of risk. Remember what happened to Adam? His darling wife Cathy blew a hole in his shoulder with a shotgun—then skipped town.

Taken singly, emerging markets can seem similarly cruel mistresses.

China's Bubble Bursts
By Clifford Coonan, The Independent

According to the above article, the Shanghai Composite share index rose 500% over the last two years, only to see its level halved over the last five months. A comparable developed market decline would be shocking. But in emerging markets, volatility's the norm. Put in perspective, investors who were up 500% five months ago are still up 300% cumulatively today—not too shabby, but still no guarantee the ride forward will be any more comfortable. Chinese growth, like growth in many emerging markets, is more akin to riding in a roller coaster than a Cadillac.

Why do emerging markets like China swing so widely? Government intervention is always a threat. Wacky policies lurk around every corner and consequently investor uncertainty makes a wild ride. Fast-growing markets often exhibit long bouts of irrational exuberance, only to undergo sharp mood swings in the opposite direction. And while private property is becoming more of a reality in China, the government is still the primary owner of industry. For instance, despite its much publicized IPO in 2007, the government owns over three quarters of PetroChina. The phrase "free market" should be used carefully.

But despite their wild nature, emerging markets present opportunities today that can't be denied. Just avoid getting carried away—don't concentrate on any one market and remember, as a group, emerging markets are only 11% of the world. (By the way, this is the same rule you should follow when investing in any country or sector.) Also, avoid the dangerous cognitive error of using one country's frightful saga as a proxy for the whole. For instance, though China may have relinquished 50% during the recent correction, emerging markets fared relatively well overall.

Though the Chinese market casting off 50% will certainly bring pain to some, well-diversified global investors need not fear or even necessarily reduce their exposure to these dynamic markets. And remember, China itself is only 2% of global markets. As the global economy continues to be healthy overall, we think the fundamental drivers underpinning emerging markets growth remain intact, and they should continue to lead this bull market higher. And hidden in all the hullaballoo, something else surprised us: In the recent Chinese downturn, edgy investors were the ones calling for government intervention, while the "New China" communist government has mostly favored the "free" market approach—perhaps demonstrating another step in China's evolution.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.