The year is still young, but apparently not too early to draw some interesting observations about a resurgence in developed markets. Bloomberg News has an interesting story on Tuesday, noting that developed markets are outperforming emerging markets for the second time over the past decade.
"The MSCI World Index of equities in 24 countries rose 6.1 per cent for 2011 through yesterday, the best annual start in 13 years, and the MSCI Emerging Markets Index of shares in nations such as Brazil, Russia, India and China lost 2.7 per cent," Bloomberg noted.
Emerging markets - with their superior economic growth profiles, attractive demographics and improving financials - have trounced developed markets over the past decade, except for the bear market of 2008. According to Bloomberg, the difference has been wide, with emerging markets outgunning developed markets by 16 percentage points annually since 2001.
This year is only two months old, which might be a bit early to define this as a shift. However, there are at least some reasons why developed market stocks are outperforming. Inflation has been rising in places like Brazil, India and China, forcing their respective central banks to tighten monetary policies, which can choke economic growth and corporate profitability.
There is also a valuation issue here: After a strong decade, some observers have been pointing out that many emerging markets no longer look compelling. Brazil's benchmark index sits at more than 13-times earnings, up from about 10 a decade ago. And India's benchmark index is above 20-time earnings, up from the low-teens a decade ago.
Meanwhile, investors have been betting on a U.S. economic turnaround, with fund flows reflecting this trend. According to the Investment Company Institute, domestic U.S. equity funds had net inflows of about $4.9-billion for the week ended Feb. 9, which is close to a two-year high.
For Vincent Delisle, strategist at Scotia Capital, these fund flows explain much of this year's rally by the S&P 500.
"Year-to-date, risk appetite has shifted into large caps and developed indices, the next step is likely a healthy pullback,"he said in a note. "However, the recent leg of this rally had 'flows' written all over it and it may be premature to bet aggressively against it, especially at a time when fundamentals (positive earnings revisions, forward P/Es below 15-times) remain supportive."
David Berman