2010: A Notable Year of Emerging Market Growth

by Mark Mobius, Franklin Templeton Investments

I view 2010 as a year of economic resurgence. Many emerging markets recorded strong GDP growth as they continued to recover from the impact of the 2008 financial crisis. In several cases, robust domestic consumption, government expenditure and intra-regional trade offset weak external demand from developed markets. This led many countries in Asia and Latin America to return to pre-crisis growth levels much faster than expected. China and India were among the world’s fastest-growing major economies during the year, with China overtaking Japan as the world’s second-biggest economy halfway through the year. [1]

Following the unprecedented fiscal and monetary expansion implemented globally in 2009, the focus for a number of major emerging economies shifted in 2010 from stimulating growth to managing inflation. Concerns about economic overheating and inflation in major economies such as China, India, Brazil, and most recently, South Korea, led authorities to steer toward the normalization of fiscal and monetary policies.

In an environment of low interest rates, especially in developed markets, ample liquidity and the search for higher returns, I think 2010 may well end up being a record year for investment inflows into emerging markets. Emerging market portfolios attracted US$73 billion just in the first ten months of 2010, on track to exceed 2009’s total of US$83 billion.[2] Fund-raising by companies in emerging markets via initial public offerings and secondary issues was at a historical high this year. Emerging market companies raised US$406 billion in initial public offerings and secondary equity issues in the first eleven months of the year, significantly higher than both the US$236 billion raised in 2009 and the previous record of US$388 billion in 2007.[3]

While emerging economies strengthened in 2010, most developed economies lagged as they remained burdened by high fiscal deficits, weak economic growth and unemployment. A few economies in the eurozone were especially at financial risk due to their large budget deficits, with the financial stability of Greece, Spain, Portugal, Ireland and other European countries causing concern. As you have probably already seen in the headlines, to avoid sovereign debt defaults, Greece and Ireland received billions of euros in financial aid from the European Union (EU) and the International Monetary Fund (IMF) in May and November, respectively. Meanwhile, investor confidence in the region continued to be fragile on expectations that Portugal and Spain may also need financial support. In the U.S., the Federal Reserve announced a second round of quantitative easing in November to inject even more liquidity into the domestic economy.

After rising nearly 80% in 2009, emerging stock markets, as represented by the MSCI Emerging Markets Index, were up 11% in U.S.-dollar terms in the first 11 months of 2010. However, equity prices experienced significant volatility throughout the year, as did exchange rates and commodity prices. Argentina, although a somewhat small and restricted market, was one of the top-performers, returning close to 70% in U.S.-dollar terms for the year to end-November, as investors anticipated long-overdue market reforms after the death of former President Nestor Kirchner. Another strong performer for the 11 month-period was Thailand, with a 51% return in U.S.-dollar terms, as investors focused on the strong fundamentals of the market and chose to overlook the political turmoil earlier in the year. Other strong performers included Chile, Colombia and Peru in Latin America, Indonesia and Malaysia in Asia as well as Turkey in Europe.[4]

I believe many of these trends are likely to continue going forward. Come back soon to see my next post on my outlook for 2011.