Emerging markets rise from decade’s gloom
By Neil Dennis
Published: January 1 2010 13:34 | Last updated: January 1 2010 13:34
After another turbulent year, the decade ended showing that youth triumphed over maturity – that emerging markets and developing asset classes like commodities outperformed established equity and bond markets.
The two major market events of the decade – the bursting of the tech and dotcom bubble in 2000 and the credit crunch in 2007 – both resulted in economic downturns and lengthy periods of very low global interest rates. This helped government bonds comfortably outperform equities.
But credit markets – the great new hope for delivering higher returns – flourished and then floundered. If investment bankers became the new devils of the era, then credit derivatives were judged by many to be their weapons of market destruction.
As the horrors unleashed by the subprime housing debacle in the US spread through the global financial system, huge injections of state money were required to keep a number of the biggest banks afloat. The crisis peaked with the collapse of Lehman Brothers in September 2008, ensuring that year was one of the worst in stock market history.
The FTSE All World index rose 32.3 per cent in 2009 but it fell 7.3 per cent over the past decade, as gains in emerging markets failed to offset the impact of two big equity bear markets in the developed world.
The Dow Jones Industrial Average reached its highest close of 14,164.53 in October 2007, just before the second bear market took hold. It saw a sharp decline in 2008 that left it 9.3 per cent lower over the decade in spite of a strong rally since March.
The broader S&P 500 fared worse, falling 24.1 per cent over the decade, its worst performance since the 1930s.
On the other side of the Atlantic, London’s FTSE 100 index hit its peak on the last trading day of 1999. It had halved from its peak of 6,930 by March 2009, and in spite of its 54 per cent rally during the past nine months, the index was down 22 per cent over the 10-year period.
Tokyo’s Nikkei 225 hit its peak 20 years ago and added to its losses in the 1990s by falling 44 per cent over the past decade.
The success stories lie in emerging markets. Russia’s Micex index rose 802 per cent over the decade after a boom in commodities spurred its oil and metals industries. Brazil’s Bovespa, again driven by the commodity boom, climbed 301 per cent. India’s Sensex jumped 249 per cent, thanks to the country’s IT talent and outsourcing skills.
China, while lacking the mineral reserves of Russia and Brazil, enjoyed rapid economic growth. The Shanghai Composite index rose 140 per cent over the decade.
Growth in US consumption remained relatively steady, but China, with its massive industrialisation programme, helped propel commodity markets to a series of record highs during the 2000s.
The benchmark Nymex oil contract ended 1999 at $25.60 a barrel. In July 2008 it hit a record $147.27 as global demand peaked. But it slipped back during the downturn that followed the credit crunch to end the decade at $79.36 – still up 210 per cent overall.
Gold’s dramatic rise reflected the metal’s enduring quality as a haven. It continued to gain during the past nine months in tandem with risk assets as central banks bought gold to diversify their reserves in the face of a weaker US dollar. Spot gold climbed 281 per cent over the 10 years to $1,096.35 an ounce.
Copper, meanwhile, the benchmark for industrial metals, gained 290 per cent to $7,375 a tonne.
The main feature on currency markets was the decline in the dollar as the US struggled to lower its current account deficit and its economic momentum stalled. On a trade-weighted basis, the currency fell 23.5 per cent over the decade.
The euro, only in its infancy as the decade began, gained 43 per cent to $1.4323 against the dollar over 10 years as it enhanced its status on international currency markets.
Japan’s yen gained 9 per cent against the dollar to Y93 as it was sought as a haven from risk during the recent downturn.
Government bond yields fell over the decade, hitting their lows as recession struck the US, UK and eurozone following the financial crisis. The yield on the US 10 year Treasury fell from 6.60 per cent at the start of the decade to 3.84 per cent at its close.
Even as recession turned to recovery in the second half of 2009, most analysts are cautious about prospects for 2010. That partly reflects fears about the impact of likely moves by governments and central banks to withdraw the monetary and fiscal stimulus programmes that have been used to ward off depression and stabilise the global banking system. There are fears too that the stimulus will eventually lead to inflation and new asset bubbles.
“History suggests this would produce a market correction,” said Larry Kantor at Barclays Capital.
The rise in risk assets seen since March would likely be reversed, he added. “We look for the biggest impacts to be rising money market rates, dollar gains and lower gold prices, but equity market and credit markets will not be immune.”
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