Emerging Markets Keep Soaring Past Their Doubters

By HEATHER TIMMONS

Published: December 29, 2009

NEW DELHI — This was a lost decade for the American stock market. But for much of developing world, it was the Roaring ’00s — a period of soaring markets and breakneck investment that left even some bulls wondering if the good times can last.

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Onlookers reacted to the stock display at the Bombay Stock Exchange building last May, when the market rallied following the decisive victory of the Congress Party.

While the broad American market lost about a fifth of its value in the last 10 years, emerging markets like Brazil, Russia, China and India powered ahead with gains in the double or even triple digits.

The numbers are staggering. On the Ukraine’s PFTS Stock Exchange — a Wild East of investing that did not even exist until 1997 — shares soared more than 1,350 percent over the last decade. In Peru, stocks jumped more than 660 percent. Here in India, the Sensex index leaped more than 240 percent.

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To believers, those heady gains underscore profound shifts taking place in the global economy, where investment dollars, euros and yen whiz across borders and time zones with the stroke of a computer key. As many Americans wait for an economic recovery, money is pouring into the fast-growing economies of Asia and Latin America, as well as into oil-rich Russia and the former Soviet bloc.

“What we’re living through now is something of epic proportions,” said Allan Conway, the head of emerging markets equities at Schroders, the big money management company in London. He likened the economic rise of nations like Brazil, Russia, India and China — the so-called BRIC countries — to that of postwar Japan.

Amid all this euphoria, even some longtime bulls wonder if investors are getting a bit carried away. Emerging markets have a history of giddy booms and crushing busts dating back to the 19th century. They collapsed spectacularly in 1997, as a chain reaction of currency devaluations, bankruptcies and recessions rocked East Asia. In 1998, the Russian market plunged more than 80 percent after the country defaulted on its debts.

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More recently, emerging markets tanked with the rest of the world in 2008, after shell-shocked money managers pulled cash from anywhere that seemed risky. But they were a bright spot in 2009 — the MSCI Emerging Markets index increased 73 percent in 2009, compared with a 25 percent jump in the S.& P. 500 index.

Despite 2009’s gains, few predict a major setback today. Since the 1998 debacle, some developing countries have cleaned up their acts, balancing their budgets and improving their trade balances. As their economies grow, domestic investors have become big supporters of these countries’ stock markets. With interest rates low around the world, companies based in emerging markets, like their counterparts in the developed world, enjoy access to cheap money. High commodities prices have buoyed stock and bond markets in nations that are big exporters of commodities.

But the recent travails of Dubai, where a debt-driven bubble economy is now bursting, provide a powerful reminder that in up-and-coming economies, what goes up can come down — and fast. That these markets have gained so much, so quickly — with some white-knuckled drops along the way — gives some investment professionals pause.

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Mark Mobius, one of the deans of emerging market investing, said that while developing markets still have room to run, the first half of 2010 could be bumpy.

“We continue to see upside, but with substantial corrections along the way, which could be as much as 20 percent,” said Mr. Mobius, the executive chairman of Franklin Templeton Investments, which is based in San Mateo, Calif.

Some market specialists worry that asset bubbles akin to the one that inflated and burst in the American housing market might be growing in places like China and Hong Kong. Others fret over the risks posed by volatile commodities prices, as well as over the inevitable end of this period of ultralow interest rates.

Leon Goldfeld, the chief investment officer for HSBC Global Asset Management in Hong Kong, told reporters this month that HSBC had cut its exposure to Asian equities, anticipating a 10 percent to 15 percent decline in early 2010. After that, Mr. Goldfeld said, Asian stocks would represent a “good buying opportunity.”

As long-term investments go, emerging markets seem to have a lot going for them. On average, developing countries have less sovereign, corporate and household debt than developed countries. Their economies are also growing faster than industrialized ones. Merrill Lynch predicts that emerging market economies will grow 6.3 percent next year, while the global economy expands by 4.4 percent.

Emerging markets are eclipsing their developed peers in other ways as well. Imports to the BRIC nations are likely to surpass imports to the United States for the first time ever in 2009, according to Morgan Stanley.

For the moment, the developing world is the engine of global growth. Emerging markets accounted for virtually all of the year’s growth in global output, because developed economies shrank or were flat. Even if developed countries recover completely in 2010, emerging economies will account for 70 to 75 percent of the growth in global output “for the foreseeable future,” said Mr. Conway of Schroders.

Developing nations are also assuming a bigger role in the world economy. Morgan Stanley predicts that developing countries, including those in the Middle East, will account for 36 percent of total global gross domestic product in 2010, up from 21 percent in 1999.

All of this is a big lure to investors. Funds focused on equities in emerging markets attracted a record $75.4 billion this year, far surpassing their previous high of $54 billion in 2007, according to EPFR Global, which tracks fund flows.

Even after that influx, emerging markets still account for only a small fraction of investment portfolios in United States and Europe, the world’s money management centers. Less than 3 percent of assets managed by United States fund managers are invested in emerging markets. That number could double in the next five years, some investment experts say.

Even normally conservative investors might be tempted to jump into emerging markets, given the sluggish outlook in the United States and Europe. After a dismal decade for the American stock market, markets in the developing countries might seem attractive.

“Investors are starting to look at this asset class and realize that it is a pretty safe place,” said Kevin Daly, who manages $1.7 billion in emerging market debt at Aberdeen Asset Management.

Despite their volatile history, emerging markets strike some money managers as relatively secure places to invest. Of course, such hopes have been dashed before.

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Can Community Colleges Save the U.S. Economy?

by Laura Fitzpatrick / Austin

Community colleges are deeply unsexy. This fact tends to make even the biggest advocates of these two-year schools — which educate nearly half of U.S. undergraduates — sound defensive, almost a tad whiny. "We don't have the bands. We don't have the football teams that everybody wants to boost," says Stephen Kinslow, president of Texas' Austin Community College (ACC). "Most people don't understand community colleges very well at all." And by "most people," he means the graduates of fancy four-year schools who get elected and set budget priorities.

Many politicians and their well-heeled constituents may be under the impression that a community college — as described in a promo for NBC's upcoming comedy Community — is a "loser college for remedial teens, 20-something dropouts, middle-aged divorcées and old people keeping their minds active as they circle the drain of eternity." But there's at least one Ivy Leaguer who is trying to help Americans get past the stereotypes and start thinking about community college not as a dumping ground but as one of the best tools the U.S. has to dig itself out of the current economic hole. His name: Barack Obama. (See pictures of Barack Obama's college years.)

The President hasn't forgotten about the 30 or so community colleges he visited during the 2008 campaign. These institutions are our nation's trade schools, training 59% of our new nurses as well as cranking out wind-farm technicians and video-game designers — jobs that, despite ballooning unemployment overall, abound for adequately skilled workers. Community-college graduates earn up to 30% more than high school grads, a boon that helps state and local governments reap a 16% return on every dollar they invest in community colleges. But our failure to improve graduation rates at these schools is a big part of the achievement gap between the U.S. and other countries. As unfilled jobs continue to head overseas, Obama points to the "national-security implication" of the widening gap. Closing it, according to an April report from McKinsey & Co., would have added as much as $2.3 trillion, or 16%, to our 2008 GDP.

Those lost jobs are why Education Secretary Arne Duncan declared in March that two-year schools "will play a big role in getting America back on its feet again." Obama tapped two former community-college officials for top posts in the Education Department and in May announced a p.r. campaign — headed by Jill Biden, the Vice President's wife and a longtime community-college professor — to raise awareness about the power of these schools to train new and laid-off workers. (See pictures of the college dorm's evolution.)

But as record numbers of students clamor to enroll, community colleges are struggling with shrinking resources or, at best, trying to maintain the status quo. Even the school where Biden teaches, Northern Virginia Community College, has lost more than 10% of its funding in the past two years and has let go of dozens of full-time professors as it braces for more possible cutbacks. Elsewhere, state budget cuts have led to enrollment caps at some community colleges. And if there aren't enough seats in classrooms, students can't get certificates or degrees, and skilled jobs remain unfilled. In short, as the Center for American Progress concluded in a February report, "America's future economic success may well depend on how we invest in two-year institutions."

Getting Students Ready to Work
The 1,200 community colleges in the U.S. are especially suited to helping students adapt to a changing labor market. While four-year universities have the financial resources to lure top professors and students, they are by nature slow-moving. Community colleges, on the other hand, are smaller and able to tack quickly in changing winds. They often partner with local businesses and can gin up continuing-education courses midsemester in response to industry needs, getting students in and out and ready to work — fast.

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For example, when Austin's semiconductor industry started tanking in 2000, ACC quickly stripped down its chip-development courses and soon repurposed clean rooms for emerging green technologies. These days, it generally takes about six months of weekend classes to get qualified to be a solar installer, a job that can pay up to $16 an hour. But starting in August, a compressed weekday program — catering to the recently unemployed — will allow students to cram the same courses into just two months. To earn an associate degree focusing on renewable energy — enough prep for a job as a solar-installation-team leader, which can pay up to $28 an hour — an ACC student has to take a total of 69 credit hours of courses, including solar photovoltaic systems, programming, physics, algebra, English composition and lab work. Average cost per credit hour for most students at ACC: $54.

Meanwhile, the building that houses ACC's renewable-energy program is chockablock with bulletin boards touting jobs. A city ordinance that kicked in on June 1 requires presale energy audits for many commercial buildings, apartment complexes and single-family homes, creating the need for more trained inspectors. Also, one of the nation's largest solar-power plants is slated to be completed next year a mere 20 miles from Austin's downtown. (See 10 ways your job will change.)

Of course, the future of the labor market is hard to predict. Hence a 2008 Labor Department study that found federal job-training programs may produce "small" benefits at best. But the outlook is promising so far at ACC: members of its Renewable Energy Students Association routinely field calls from prospective employers. "I'm well aware of how much money is going to be available from this education," says Duane Nembhard, 34, who dropped out of college but found his way to ACC last year.

To make that money, however, students like Nembhard need to get their degrees — and the statistics are disheartening. Only 31% of community-college students who set out to get a degree complete it within six years, whereas 58% of students at four-year schools graduate within that time frame. Students from middle-class or wealthy families are nearly five times more likely to earn a college degree as their poorer peers are. In 2007, 66% of white Americans ages 25 to 29 had completed at least some college, compared with 50% of African Americans and 34% of Hispanics.

While the U.S. ranks a respectable second (after Norway) in producing adult workers with bachelor's degrees, it has slipped to ninth in producing working-age "sub-bachelor's" degree holders, which is one reason Obama is working on a plan to help every American get at least one year of college or vocational training. "If you're going to increase the population that has some college, it isn't going to be among upper-middle-class white people," says Thomas Bailey, director of Columbia University's Community College Research Center. "Community colleges will have to play a central role."

That is, if they have enough resources to handle all the students. Chronically cash-starved, two-year schools pull in an average of just 30% of the federal funding per student allocated to state universities — though they educate nearly the same number of undergraduates. (Even after you account for the academic research that goes on at four-year schools, experts say community colleges still get shafted.) Two-year schools have been growing faster than four-year institutions, with the number of students they educate increasing more than sevenfold since 1963, compared with a near tripling at four-year schools. Yet federal funding has held virtually steady over the past 20 years for community colleges, while four-year schools' funding has increased.

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Saving Cash, Living at Home
Community colleges are used to doing more with less. But this recession has led to record enrollment surges at many two-year schools, in part because of the influx of laid-off workers but also because more members of the middle class are looking to save money on the first couple of years of their children's higher education. Among them is Bruce Anderson, an Austin attorney who has lost nearly a third of his savings since the recession began and doesn't want to sideline his kid while waiting for the market to come back. His son Tyler will start at ACC this fall and, as long as he lives at home, will save the family about 90% of the annual tab at a four-year residential college. "He can get his basic core courses out of the way at ACC and then do his focus for his major at a four-year institution," Anderson says. (See pictures of a college for Native Americans.)

But as more students like Tyler enroll, classes are maxing out. Community colleges, which pride themselves on being open to all, rarely cap enrollment outright, as state universities in places like Arizona and California will do this fall. Miami Dade College, the country's largest community college, admitted on May 28 that state budget cuts will force it to forgo adding hundreds of class sections. As many as 5,000 students will be unable to enroll, and 30,000 may be unable to take the classes they need in order to graduate. In California, where Governor Arnold Schwarzenegger remains a champion of community colleges, having studied at one, as many as 200,000 would-be students may get squeezed out of higher education next year.

Taken together, skyrocketing enrollment and shrinking budgets could mean that just as record numbers of students seek out a community college, earning a degree from one may be harder than ever. Says Melissa Roderick, a professor at the University of Chicago who studies school transitions: "This group of kids will pay a high economic price if we don't step up as a nation."

What would stepping up look like? For starters, Congress needs to double the federal funding for these schools, according to a May report from the Brookings Institution. But, the report argues, to truly "transform our community colleges into engines of opportunity and prosperity," funding needs to be tied to performance in areas like degree completion — a model some states, including Indiana and Ohio, are already trying. The City University of New York has rigged up an experimental program that requires its community-college students to take intensive remedial courses if they aren't prepared to do college-level work. Begun in 2007 with the goal of getting at least half of the study's 1,000 participants to graduate from college in three years, it's showing initial signs of success. Other colleges are redoubling their retention efforts. And last fall, the Bill & Melinda Gates Foundation announced up to $500 million in grants, aiming to double college-completion rates by 2025. As Sara Goldrick-Rab, an assistant professor at the University of Wisconsin at Madison and co-author of the Brookings report, puts it, "Money speaks louder than anything."

Ultimately, community-college administrators hope their schools will emerge stronger from the downturn as it highlights their potential for juicing the economy. "In some ways, the terrible nature of the economic recession will actually help people understand [community college]," says Kinslow. "People are going to be forced into looking at it more carefully."