The inside-out story of emerging markets

Chinese leverage, currency fluctuations, and other evolving risks, but still promising opportunities in select regions

Morningstar 10 June, 2019 | 1:47AM

The late Sir John Templeton was famed for saying “the four most dangerous words in finance are ‘this time it’s different’”. This wisdom has provided a lot of value over the years and his preference for historical analysis has been particularly useful in understanding market cycles in a long-term setting. However, one must also be mindful that markets evolve. Emerging markets are a great way of illustrating such dangers as history is unlikely to repeat itself in this heterogeneous and progressive block.

The fact that almost 80% of the emerging market index is from countries that weren’t even investable in 1988 demonstrates how far emerging markets have come. Countries such as China, Russia and Taiwan have opened up and taken a large amount of market share relative to the 1988 exposure which was dominated by Malaysia.

The same issue also applies by industry, with drastic changes notable. Information technology is better known for its U.S. representation, but has been a big mover in emerging markets too and now accounts for around 24% of the emerging market index (and around 33% in Asian emerging markets). This has evolved from just 5.5% of the emerging market index in the late 1990s. 

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