Two years ago I was in London talking to a senior manager from one of the big U.S. banks about investing in German real estate.
I explained that we could generate around 10 percent returns with little risk.
His reply was “Germany is old news, why put money in German real estate, when I can buy an emerging market stock index and make more than 10 percent a year without any work?”
I replied that Germany, on a risk-adjusted basis, seemed to me like a much safer bet than Thailand or Malaysia. He politely smiled at me and said he was not interested.
This summer the Shanghai Shenzen Composite Index and the Hang Seng (the Hong Kong stock market) indexes all fell back to 2011 levels and the IBOVESPA Brazilian stock market index is now worth 40 percent less than in 2011 in the face of political turmoil and the political inability to deal with a slowing economy; the real’s devaluation follows hand in hand.
The Thai and Malaysian markets have given up most of the gains of the last two and a half years and Russia, hit by well thought-out sanctions as a result of its military escapades, has falling stock markets and a currency in free fall.
Emerging markets proved to be less resilient and riskier than people though, probably because most are not as stable politically and economically as the ‘Old World’ and things change a lot quicker than in Europe or North America.
If we take into consideration currency devaluations and actual inflation, the losses are even greater than the stock market losses would indicate. The euphoria came to a sudden end on the realization that speculation and expectations, rather than fundamentals, were responsible for driving up stock prices.