Emerging Optimism

Story Highlights:

• Stocks have rallied hard over the last few weeks, but though developed countries – the source of most financial market angst – seem to be getting most of the attention, stocks in emerging markets are actually leading global markets higher.
• In the past, emerging markets turned to developed countries for aid during economic downturns, but today, most emerging markets are on solid ground.
• In fact, emerging countries are making significant contributions to the enormous wave of fiscal and monetary stimulus currently sweeping the globe.
• The rise in emerging markets stocks is a positive sign prospects for an economic recovery are improving.

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Global stocks wrapped-up a sixth consecutive positive week today. Since the March 9 low, stocks worldwide have gained almost 30%. Investors have been keeping a close eye on economies and markets of developed economies since they're the main source of our current economic angst. But stocks in emerging markets have actually led global stocks higher.

Despite the recent rally, most developed market indexes remain slightly negative for the year, but emerging market stocks have fared much better. The MSCI Emerging Market Index, which tracks stocks in emerging markets around the world, is up an impressive 14.2% year-to-date. Generally, emerging markets stocks tend to be sensitive to the state of the global economy. Many emerging economies rely heavily on exports for growth, so global trade plays a big role in firms' profitability. And some emerging markets have high concentrations of stocks in economically sensitive sectors such as Energy and Materials, further leveraging those markets to global economic growth. So the fact emerging market stocks are doing well of late despite well-known global economic woes is a good indication the global recession isn't accelerating.

Often, emerging markets are lumped together as if they're all the same, but that's not the case. A closer look at the performance of individual countries comprising emerging markets reflects these differences. Stocks in some Eastern European countries have continued to struggle this year as questions remain about the health of their finances tied primarily to high levels of foreign currency denominated loans and plummeting currencies. Hungary and Poland, for instance, are the worst performing emerging markets so far this year with Hungarian stocks down -13.5% and the Polish stocks off -12.9% in US dollars. But it's wrong to paint even countries within this area with the same brush as even regional economies and markets can be quite different.

By contrast, the stocks in the so-called BRIC countries – Brazil, Russia, India, and China – have fared quite well this year. Stocks in these countries are up 31.7%, 27.4%, 13.6%, and 13.8%, respectively. S. Korea – not a BRIC country but second only to China in stock market value – has also rebounded with shares there up 12.8%.

In past economic downturns, emerging markets relied on developed countries for aid, and some are doing so again. In fact, the International Monetary Fund (IMF) recently for just such an eventuality. But most developing countries are financially sound, and many are helping themselves by implementing stimulus programs as large as or larger than developed countries relative to the sizes of their economies. China has been most aggressive, last year announcing at $586 billion stimulus plan (14.0% of China's GDP). Russia has announced $90 billion of fiscal stimulus (6.4% of GDP). India – $60 billion (5.0% of GDP). S Korea – $54 billion (5.8% of GDP). These are significant contributions to the wave of stimulus currently sweeping the globe.

Developing countries in aggregate still comprise a relatively small portion of global equity markets, but. Their outperformance doesn't mean the global economy is out of the woods yet. But emerging market stocks discount future economic conditions as do stocks in developed markets. A strong rebound is a positive sign prospects for an economic recovery are improving.