Through June 2002, while U.S. diversified stock funds lost nearly 11 percent for the year-to-date, diversified emerging markets funds gained 4.4 percent, according to Morningstar Inc., of Chicago. These stocks had been beaten down so much that they looked extremely attractive at the beginning of the year.
The gains of 2002’s first half are respectable but they pale in comparison with the 75 percent and 72 percent returns of 1993 and 1999, for emerging markets. Therefore, this category may have further room for growth.
The short-term outlook is good. Corporate, government, and local economic improvements have played major roles in this year’s emerging markets rally, and further progress in these areas appears likely. At the same time, developing nations tend to be suppliers to the developed world, so they should benefit if the U.S. and Europe economies perk up in the second half of 2002, as many observers expect.
Moreover, some major emerging markets still look cheap. On a price-to-earnings and a price-to-book-value basis, they’re 50 percent less expensive than U.S. stocks. The U.S. dollar appears to be heading into a bear market, too. Low valuations and strengthening currencies could attract investors to emerging markets stocks, driving up prices.
