Almost half of the world’s $US57bn ($63.25 billion) in initial public offering volume in the third quarter was for companies based in emerging markets - much more than their share of the world economy. With 118 flotations in the third quarter for groups in Brazil, Russia, India and China, the boom is impressive. A big chunk of it relates to the Chinese market, where exchange controls and a huge domestic savings pool have driven the Shanghai stock market’s valuation to a sky-high price-earnings ratio above 50.
That sounds decidedly frothy. Outside China, however, there are only modest signs of overheating, even though the Morgan Stanley Capital International Emerging Markets Share Index is up 31% so far this year. In any event, even localised market crashes are unlikely to derail emerging economies overall. Their liquidity is at record levels, their balance of payments is positive, and debt service is low.
Traditionally, a worldwide credit crunch is supposed to damage emerging markets first, as occurred with the Asian crisis in 1997. This time around, though, emerging markets are generally running modest payments surpluses, except in Eastern Europe where the prospect of accession to the European Union has brought massive capital inflows. Emerging market foreign exchange reserves are also at a record $3.2 trillion, or $2.1 trillion excluding China, while only about $420bn of emerging market debt matures before the end of next year.
That partly explains why emerging market bond indices have performed well in the last five years. True, risk premiums on debt have declined across the board. But the trend also reflects a genuine improvement in the creditworthiness of many emerging markets.
Problems exist: for example, over-exuberant expansion in China, a public sector deficit in India, and excessive foreign currency mortgage borrowing in Eastern Europe. But in general, emerging markets’ economic expansion appears soundly based.
Emerging markets are not immune to a global credit crunch. But these days, their financial positions are generally solid. They are unlikely to be the epicentre of the next crisis.