I was too young to understand 1970-80 bull market, and I have only charts for Hong Kong and it was and is not a commodity producer, but the HK market did extraordinarily well.


HK index ( in Blue) went up more than 350%, while the Dow industrials ( in Black) only went up about 20%.


It is counter-intuitive that EM would perform better when commodities prices have fallen and inflation comes down. Since everyone now believes lower oil prices hurts commodity producing countries. That is very short sighted view.

Notice the bull market from 1986-94, a period that had low oil prices, was massively stronger than the one from 2002-11, a period that had strong oil prices. That occurred despite the fact that valuations at the 1999-2002 bottom was lower than the 1986 bottom.

The reasons I believe are:

  1. the USD was taken off gold standard in the early 1970’s and allowed to float freely, various political and financial events caused the USD to rise too far into 1985 and caused Latin America’s crisis in the mid 1980’s, sounds familiar?
  2. Even the Asian Financial crisis of the late 1990’s pushed EM valuation into depressed territory, Taiwan, Korea, the 2 biggest EM markets already had very large blue chip companies with little growth potential ahead.
  3. In general, as commodity prices fell and eventually stabilized in 1985-6, the global stagflation period was finally over, that drove interest rate down and encouraged domestic credit expansion for businesses and households, after the affected banks were recapitalized or nationalized. This is the biggest driver of EM returns.
  4. 2008-9 was the global financial crisis brought on by wall street in the US, so it took away 4 years of returns for EM.

Let’s hope this process in Item 3. will start right now in 2016 in the higher interest rate countries in EM.

Brazil, Greece, Turkey, Egypt, Colombia, Nigeria