November 14, 2003

Maybe, just maybe, the senselessness of emerging market contagion can be laid to rest. Hold thumbs that it has.

A sneeze in Asia once caused flu in Latin America and pneumonia in South Africa. Significant variance in the respective countries' economic wellbeing went unacknowledged.

Causal relationships between their stock markets existed only in the minds of New York and London traders who couldn't spot Kuala Lumpur and Buenos Aires on a map. Yet the share prices and currencies of emerging markets nose-dived, similarly and simultaneously, on a bizarre panic theory that troubles in one spelled troubles in all.

At least for South Africa, for now, the contagion factor looks flat.

Argentina is again unable to repay foreign debt; Russia, in a power struggle between corporates and the Kremlin, is again witnessing capital flight.

Previously, these could have presaged a run on emerging markets. These days, it passes them by. Even cacophony in Zimbabwe, closer than ever to collapse, no longer causes avoidance of South Africa, where the rand holds strength.

Over the past year, measured by total dollar returns, investors in FTSE emerging market indices have done exceptionally well and certainly much better than those in the developed sector. It also appears from the indices that, for October, when their crises hit, the contagion was contained within the respective regions of Argentina and Russia.

In dollars for the 12 months to end-October, South Africa was a star. Its 78 indexed stocks produced a 53 percent total return against an all-world average of 25 percent. But in rands, affected by the heavy weighting of resources, it was pretty dismal at 5.3 percent against the world index's 18 percent.

By weighted contribution in rands, October's top performers were MTN, Sasol, FirstRand, Impala Platinum and Anglo Platinum. Bottom were Western Areas, Murray & Roberts, Gold Fields, Nedcor and Sappi.

These are details. They invite sectoral comparison in an international context, comprehensively available on

It appears to show not only that emerging markets have been back in favour for some considerable time, but also that index trackers have become more selective and astute at isolating countries for investment.

Today there are many more specialist indices than in 1997 and 1998, when a string of calamities - from the Thai baht's "dirty float" to the Russian foreign debt default - saw the FTSE all-emerging markets index crash 61 percent.

The emerging markets' superior performance creates its own momentum because it compels fund managers to give them due attention. More than this, emerging markets have historically performed best when (as now) the world economy seems poised for cyclical upswing.

Also, on price:earnings criteria, better emerging market stocks still look relatively cheap. As another favourable consideration, with South Africa conspicuous, emerging markets have generally improved their corporate governance.

FTSE researcher Peter Wall has noted that countries in the emerging markets category represented 85 percent of the world's population but only 21 percent of its production.

"Expectations are that people and businesses in emerging markets will successfully close the production/income gaps with developed economies, generating economic sales and, hopefully, profit growth and share price appreciation well in excess of those in more stable growth economies."

"Naturally, some emerging markets will do so faster and in a more linear fashion than others, but surprises on the downside are to be expected as well."

So far, so good. Touch wood.

Allan Greenblo is South Africa adviser to FTSE, the independent global index company. He writes in his private capacity