Equity investment prospects in emerging markets

Abstract

The Mexican debacle in late 1994 had a contagious, if short-lived impact on emerging markets. Evidence suggests that fund managers panicked and withdrew investments. Portfolio equity flows to emerging markets decreased by more than a third in 1995. The investor base shrank. The longterm case for investing in emerging markets is, however, very strong. Most of them are growing faster, some much faster, than developed countries, and are likely to yield higher returns on investment. By one estimate, emerging markets will increase their share of world stock market capitalization from 15 percent in 1995 to 45 percent in 2010. The article will review the trends in private capital flows and prospects for the future, focusing on opportunities in East Asia as an example. The author discusses the investment strategies that help explain the panic of 1995 and proposes a more analytical approach to investment in developed markets and the information needed to facilitate its adoption.