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Shifting Wealth: The Emerging Bull Market at Trader’s Narrative





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Last week we looked at the growing dichotomy between developed economies and emerging economies. While developed countries are piling on the debt close to 1950’s levels, emerging economies are becoming the global growth engines.

Here is a chart which shows the shifting wealth more clearly:

OECD shifting wealth Jun 2010

The chart is from a recent OECD report titled “Perspectives on Global Development 2010: Shifting Wealth”. You can read it in its entirely below.

As an economic transformation, this is interesting, but what does it mean for investors?

For starters, the ‘lost decade’ for equities which left investors without anything to show for their patience is predominantly a reality for developed markets. The S&P 500 index (ex dividend) has returned -24% since 2000. In contrast, emerging markets (as measured by the MSCI Emerging Markets index) have returned 96%.

Click to see a larger chart in a new tab:
MSCI Emerging markets index long term chart June 2010

If the shift of wealth continues between developed and emerging markets, this will continue to be reflected in their respective stock prices. Notice how in the cycle previous to this one, emerging markets were going sideways and building a base even as developed stock markets were on a tear, rising into the crescendo that was the technology bubble of 2000.

Much of this has to do with the commodities and equities cycle. Most emerging economies are sellers of commodity goods and average, developed economies are buyers.

Being aware of the larger picture and the shifting sands is important because it provides you with a broad context for what is playing out in the financial markets. There a lot of ways to play this of course. You have your pick of index like the MSCI Emerging Markets as well as the iShares MSCI ETF (EEM) which is based on it. Then there are individual stocks (usually ADRs). In any case, I hope that provides you with some inspiration for further analysis.

Here is the OECD report in full:

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