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Reduced inflation, lower interest rates and lighter government debt burdens have strengthened developing nations’ infrastructure and allowed them to weather the current subprime-induced global jitters.
The MSCI Emerging Market Index has bounced back from August’s slide and it up 2% since the beginning of July. The S&P 500 was down 1.75% during the same period.
"Ten years ago, emerging markets would have been very badly hammered in market conditions like this," Charlie Metcalfe of First State Investments said.
Better fundamentals and greatly reduced dependence on foreign capital means emerging economies are now less vulnerable to a liquidity squeeze. Indeed, they no longer deserve to be deemed risky, reckons Allan Conway of Schroders. Growing talk about Asian countries in particular decoupling from the West has fueled investor confidence in these newly emergent economies.
Still, while the long-term outlook remains promising, it's too soon to declare the risk is gone. Emerging-market stocks are highly sensitive to global growth, which for the past five years has been advancing at better than historical norms, notes Gray Newman of Morgan Stanley.
Nor has the decoupling thesis yet been tested by a U.S. recession. So emerging markets investors could be shaken if the U.S. slowdown "morphs into a patch of below-trend global growth," according to a recent report. According to one forecast, a U.S. recession would slash global growth to 3.5% from today's growth rate of nearly 5%, Bloomberg News reports.