The Hindu Business Line : Global markets: No place to hide

BL Research Bureau The year 2008 will go down in history as one of worst years for equities since the Great Depression. Whether you invested in developed markets, emerging markets or the hot frontier markets, stock price declines were equally severe.

Down 44 per cent

The MSCI World index, which tracks the stock price movement in 23 developed nations, lost 44 per cent, one of its steepest annual falls since it was flagged off in 1969. Erosion in stock prices was even steeper in the emerging and frontier markets, the outperformers of 2006 and 2007. Both the MSCI Emerging and Frontier market indices lost around 55 per cent in 2008.

Deleveraging

The fall in these benchmark indices can directly be attributed to the ongoing global credit crunch which was preceded by housing bubble bust in the US. Almost all developed nations were affected as their financial institutions had exposure to toxic assets and these illiquid assets led to the meltdown of financial institutions. The credit crunch was so severe that FIIs had to sell their investments in equities across the globe to de-leverage and to meet the redemption requests from their investors.

Country divergence

The country-wise performance of equity markets is, however, not uniformly bad. MSCI Switzerland was the outperformer among the developed markets with a 32 per cent fall. But the sharp appreciation of Swiss Franc in the last two months is largely responsible for this. MSCI Ireland is the worst performing index in MSCI space, as the country was the first among the Eurozone economies to slide into recession.

Emerging markets fell out of favour in 2008 as the famous “decoupling” theory bit the dust. While trade surplus countries such as China, Taiwan, Brazil, and Russia had to suffer due to commodity meltdown, those such as India, South Korea took a hit because of the depreciating currency, as they are net importers.

Surprisingly, frontier markets, despite their higher risk and low liquidity, didn’t do much worse than the emerging markets, probably due to low FII interest. While bankrupt nations such as Ukraine fell the most, African nations such as Tunisia, Kenya and Jordan have outperformed the MSCI Frontier market index.

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