WHETHER THE GROUP OF 20 ESTABLISHED A "new world order," as British Prime Minister Gordon Brown asserted Thursday at the end of the London meeting of world leaders, it clearly gave a boost to the emerging markets of the world.
The G20 approved a $1.1 trillion package designed to pull the global economy out of recession, with a $750 billion expansion in funding for the International Monetary Fund, $100 billion for the World Bank and $250 billion in trade financing through multilateral financial institutions. Of the $750 billion for the IMF, $250 billion represents the creation of $250 billion of Special Drawing Rights, which is roughly the equivalent of printing money globally.
Stock markets around the globe soared following the G20 agreements, with the Dow Jones Industrial Average adding another 200 points to close just below 8,000 for the first time in nearly two months. Assets that have benefited from investors' aversion from risk, such as Treasury securities and the Japanese yen, fell sharply. Meanwhile crude oil rebounded.
Emerging market countries figure to be the biggest winners from the G20's package, according to Citigroup economists Don Hanna and Jurgen Michaels. Support for multilateral financial institutions is especially helpful for emerging markets, they write in a research note. So, too, is the increase in SDRs, which they note can be drawn down without conditions.
Emerging markets responded with sharp gains. The iShares MSCI Emerging Market Index exchange-traded fund (ticker: EEM), a useful proxy for the sector, surged 5.4% Thursday, about twice the gain in the Dow. Since its low of early March, the emerging markets ETF has surged 35%.
But even before the G20's largesse, emerging markets looked to be a big beneficiary of the Federal Reserve's monetary expansion, according to MacroMavens' Stephanie Pomboy. Just as the Fed's liquidity pumping after the dot-com bubble burst created the housing bubble, the U.S. central bank's exertions would serve to lift emerging markets, she writes in a note to clients.
The surplus liquidity isn't likely to ignite an inflationary boom in the U.S. economy if consumers refuse to borrow and spend. But that liquidity has to go somewhere, and emerging markets look like the most likely destination, she reckons.
Emerging markets and commodities took the first hits in the credit implosion because they were viewed as warrants (long-term call options) on global growth. Could it be emerging markets are moving from warrants on global growth to drivers of growth?
Meantime, Ms. Pomboy points out that while emerging economies account for 43.7% of global output, they represent only 10.9% of global stock market capitalization. China by itself makes up 15% of the global economy but less than 2% of market cap while the U.S. provides 21% of output but 43.4% of market cap.
"With so much room to grow…and so much money to flow..might the Emerging Markets become the next bubble?" she asks rhetorically. "All the ingredients are there, the persuasive story line (from their savings to their demographics), the dearth of compelling investment alternatives and, of course, the Fed's flowing font of cheap capital."
Now that's being augmented by the gusher being provided by the G20. And with a simple way to play it such as EEM, plus any number of single-country ETFs (notably the popular iShares/Xinhua 25 , better known by its ticker, FXI), it's easy to see traders' flocking to emerging markets.