- Modern emerging markets will celebrate their 30th birthday on December 31, 2017, the anniversary of the creation of the MSCI EM Index.
- The team at Renaissance Capital outlined the 2,400-year history of emerging market investing, in honour of the upcoming birthday.
- The “first EM crisis” the team found was in 4th century Greece.
Modern emerging markets will celebrate their 30th birthday on December 31, 2017, the anniversary of the creation of the MSCI EM Index.
The economies that we today consider to be “emerging,” however, are not necessarily the ones that would have been considered emerging several centuries ago. China, for example, led its European counterparts by leaps and bounds at the start of the Renaissance.
In honour of the MSCI EM Index’s upcoming birthday, Renaissance Capital’s Daniel Salter, Vikram Lopez, Charles Robertson, Yvonne Mhango, and Oleg Kouzmin outlined the 2,400-year history of emerging market investing in a report to clients.
Business Insider broke down their excellent research into a short timeline:
- 4th century BC: The first EM crisis the RenCap team could find was 4th century Greece. 10 Greek municipalities belonging to the Attic Maritime Association defaulted on their loans from the Delos Temple. (As a reference point, Plato, Aristotle, and Alexander the Great were alive during the fourth century.)
- 1602: The Dutch East India company is founded. It was the first joint stock company to have freely tradable shares.
- 1720: The South Sea Bubble “would make EMs infamous,” writes the RenCap team. Even Isaac Newton, one of the smartest people to ever live, was not immune to the irrational frenzy of the crowd.
- 1763: Baring Bros. opens. The firm financed the Louisiana purchase in 1803.
- 1804: N.M. Rothschild & Sons opens its London office. The Rothschilds organised financing for the first attempt at a channel tunnel between France and Britain (1872), and Britain’s purchase of Egypt’s shares in the Suez Canal (1875).
- 1822 to 1824: Bonds were floated in London by Colombia, Chile, Peru, the Province of Buenos Aires, Brazil, Mexico, Guatemala, Greece, and the imaginary “Poyais.”
- 1825: The London Panic of 1825 triggers a bunch of sovereign defaults. Peru was first, and was swiftly followed by many others. All Latin American issuers except Brazil were in default by the end of the decade.
- Mid-1800s to early-1900s: Many “modern” EMs begin to emerge. Russia is the first EM to see trading of shares circa 1830 at the St. Petersburg bourse. It ceased to be a market economy in 1917 after the revolution. A similar story happened in China in 1949.
- 1930s: Over 40% of countries that Renaissance Capital got data on were in default by 1936. The double-whammy of the Great Depression and rise of protectionism led to a collapse in global trade triggering a series of sovereign debt defaults, they write.
- Post WWII: EMs tended to borrow only from banks and multinational organisations, in dollars or other hard currencies.
- 1971, the collapse of Bretton Woods: US banks continue lending to EMs amid a challenging global backdrop of oil crises, inflation shocks, and recessions.
- 1979 to 1980: Paul Volcker’s Federal Reserve hikes rates to 20%. “The associated dollar spike and increase in interest costs combined with the world economy entering recession in 1981 saw Mexico as first to announce that it would no longer be able to service its debt, in August 1982,” the team at Renaissance Capital wrote.
- 1980s: US banks, overexposed to EMs, pull back more lending, leading to a bunch of defaults. The crisis hit Latin America most broadly, but Eastern Europe and Africa were hit, too.
- 1989: The Brady Plan, named after then-US Treasury Secretary Nicholas Brady, plus the drop in global interest rates, eventually helps end the crisis.
- 1998: “After a decade of defaults, all major Brady restructuring were completed, and had resulted in a liquid, easily tradable market of hundreds of billions of dollars of standardised dollar bonds issued by EMs,” the RenCap team wrote. “Over time, more traditional hard currency eurobonds started to be issued and Brady bonds retired.”
- BONUS — 2001: RenCap doesn’t add this on their list, but we wanted to round out the history with a modern episode: Goldman Sachs’ Jim O’Neil came up with the term “BRIC” — for Brazil, Russia, India, and China — in 2001. South Africa is later added in 2010, making the term BRICS.
“What makes an EM? There’s no easy answer,” the analysts at Renaissance Capital said after going through the full history.
“Things change over time: Greece today is considered an EM. But in fourth century BC when municipal defaults occurred in what we cheekily described as the ‘first’ EM crisis, it was one of the worlds most advanced countries.”
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