Don't Give Up on Developing Markets

Most investors today worry about inflation and the response to it from the Federal Reserve, but it's time for a longer view.

- By James K. Glassman

If you're buying stocks for gains over the next 10 years or more, you need to imagine the contours of the future. A July report from the United Nations gives a hint. Researchers estimate that practically all population gains through 2050 will occur in developing countries-especially India, which will become number one next year, surpassing China. Nigeria will be third, tied with the United States. Other nations whose population will grow at a good clip are Indonesia, Brazil, Pakistan and Bangladesh.

Of course, population isn't everything. But developed nations have powerful assets in their invested capital, infrastructure and education systems. All I'm saying is that it's foolish to ignore developing economies, especially now.

In 1988, the research firm MSCI launched its Emerging Markets index, with stocks from 10 countries that represented just 0.9% of MSCI's All Country World index. Reflecting the rising importance of developing nations in the global economy and financial markets, the EMI today includes stocks from 24 countries accounting for 12% of the ACWI. Since the end of 2000 through August 31, the EMI has outperformed the ACWI by two percentage points annually, on averagea significant difference.

Lately, it has been a different story. The EMI returned an annual average of just 0.6% for the past five years through August; the ACWI returned 7%, and MSCI's USA index returned. 11.8%. IShares MSCI Emerging Markets, an exchange-traded fund, has declined in five of the past 10 years and is down nearly 20% so far this year. Many emerging markets are suffering higher inflation than the U.S. and Europe. Nigeria recently hit a 17-year high of 19.6%; in Turkey, consumer prices have doubled in three years.