We are intrigued by the notion that there might be a relationship between the appetite for stable dividend stocks in the US or Switzerland and the massive stock market rally in Japan. Investors—in varying degrees—may be concluding that the bonds issued by their governments are no longer reliable sources of stable returns, and, along with their bank deposits, may not even remain good stores of value if the inflation goals set by their monetary authorities are realized. The careful weighing of coupon income, price risk, and expected inflation that drives Western bond investors to invest in stable dividend stocks is the same calculus happening at hyper-speed in Japan, where savers, households, and professional investors are being metaphorically exhorted to get their money out of cash deposits because their government is purposely going to trash its spending value. The world is entering a very peculiar phase of financial risk and return.
We are not ready to exaggerate reports of the death of emerging markets. While the overall MSCI Emerging Markets Index (the "Index") has been relatively unexciting of late, it is important to remember the makeup of the Index before drawing broad conclusions about the opportunity set. We find a lot to be positive about in our investment universe, particularly among the smaller emerging markets. One of the reasons the Index has been weak is the poor performance of the Index heavyweights, specifically the quartet of countries commonly termed the BRICs (Brazil, Russia, India and China), which have a combined 44% weight in the Index. During the quarter, China was down 5%, Brazil slipped 1%, while India and Russia each fell 3%. But several smaller markets did exceptionally well. During the same period, the Philippines rose 19%, Indonesia 13%, Thailand 10%, and Turkey 8%. However, those four countries only contribute about 9% to the Index.
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