Suffering Emerging Markets Can Bounce Back From the Depths

Suffering Emerging Markets Can Bounce Back From the Depths

Asia's emerging-market stocks are on track to outperform peers elsewhere in the world by the greatest margin in a quarter of a century this year, as stocks in East Asia's manufacturing hubs steam ahead. But that yawning crevasse could narrow in the months ahead.



Stocks included in the MSCI EM Asia index are up 17.5% in dollar terms this year, while the MSCI EM ex-Asia index is down 19.9%. That leaves the largest gap between the two since the Asian financial crisis in the late 1990s.



The two blocs can be broadly divided along economic as well as geographic lines. Those with large, manufacturing-based current-account surpluses have performed very well this year. As it happens, the largest examples“”China, South Korea and Taiwan“”are in East Asia. The three make up around 70% of the benchmark MSCI EM.



Those with persistent current-account deficits, such as Brazil, Mexico and South Africa, have done much more poorly. India, though of course in Asia, would also fit better into that camp economically. Countries such as Saudi Arabia and Russia, where commodity-driven current account surpluses have collapsed, have struggled too.



In short, the countries that have been hit hardest this year have the