Emerging Market Contagion?

If you read the newspaper in the past several weeks, you would think emerging economies were on the brink of imploding: a coup in Thailand, an assassination of a central banker in Russia, a budget fiasco and rioting in Hungary and a political maverick in Mexico declaring his own government after losing an election fair and square. But what really happened? Well, the MSCI Emerging Markets index has only rallied 16% from mid-June and over 10% so far this year. So, where's the contagion?

The truth is that there are strong fundamental and structural forces working in emerging markets favor. Deregulation, business friendly legislation, declining inflation, more developed infrastructure and stronger fiscal positions all argue for continued strength and resilience in the face of political uncertainty.

With the large run up in emerging markets stocks in the last three years—a 37.8% annualized return—the media continues to focus on reasons why they think the party is over. We think otherwise.