The Emerging Market Bubble
The collapse of the Japanese market shifted the emphasis of global en-
thusiasts to emerging markets—markets in developing countries. In-
vestors had already witnessed the stock booms of Taiwan, South Korea,
and Thailand. Now India, Indonesia, and even China were set to join the
club.
And Asian countries were not the only markets put into play. Latin
America, long a backwater of authoritarian, anti-free-market regimes (of
both the right and left) had turned full circle and aggressively sought
foreign investment. Equity gains were impressive in such countries as
Argentina, Brazil, and Mexico.
Even China, the last major country ruled by communist leaders, de-
veloped stock markets. The opening of the first Chinese stock market in
Shenzhen in 1998 was met with a riot as thousands stood days in lines
waiting to be allocated shares in firms in the world’s most populated
country. And who would have imagined that investors in Hong Kong
would beat those in the United States during the last decade, despite the
fact that the island nation was handed over to communist China, once
the sworn enemy of capitalism?
The term emerging marketsevokes the image of a beautiful butter-
fly rising from its chrysalis, ready to soar to the heavens. But a more
accurate name might have been “submerging markets.” The enthusi-
asm that greeted these markets far exceeded their performance. Just as
birds eat most butterflies soon after they take wing, the bears de-
voured many of these newly emerging markets soon after investors
rushed in.
The year 1997 marked the beginning of the worst collapse in the
history of emerging markets. The emergent Asian economies, idolized
by many investors who had sent their shares skyward, saw their cur-
rencies and equity prices plummet. In 1998, the bearish contagion
spread beyond the Pacific Basin to Latin America, Eastern Europe, and
Russia.
In that two-year period, virtually no emerging market was safe.
Most, if not all, of the countries’ stock markets fell by at least 50 percent
in dollar terms, and many fell much more. Measured in U.S. dollars, the
Indonesian, Thai, and Russian markets fell more than 90 percent, and
those in the Philippines and South Korea fell more than 80 percent. Even
stocks in the strongest and most advanced of these developing coun-
tries, Singapore and Hong Kong, fell 70 percent.
166 PART 2 Valuation, Style Investing, and Global Markets