As long as human nature stays the same, the world markets will be subjected to declines exactly as they did in the past. 1990s were very good years not only for the WSE but for most of the world’s exchanges and stocks. Growth stocks and value stocks. U.S. stocks and foreign stocks. The smallest of the small stocks and the biggest of the big stocks. Perhaps one of the most important financial developments of the 1990s has been the recognition of the emerging markets as an asset class. Emerging markets have been among the best-performing asset categories in the last 50 years. As an asset class, they produced an average annual return of 18.5% versus 11.8% for the S&P 500. The force behind the emerging markets is privatization.
Privatization is a process through which the ownership and control of companies or assets changes in whole or in part from the public sector to the private sector. Through privatization a government or state divests or transfers all or a portion of its interest in a state enterprise to some form of private ownership. In contrast, nationalization is the process through which a government or state assumes control of a privately owned enterprise. Privatization’s may take the form of individually negotiated transactions, including trade sales or management buy-outs or a public offering of securities. Governments and states with established economies, including, among others, France, Great Britain, Germany and Italy, and those with developing economies, including, among others, Argentina, Mexico, Chile, Indonesia, Maleysia, Poland and Hungary, that were then engaged in privatization.
The equity securities of privatized companies offered investors opportunities for significant capital appreciation. In particular, because privatization programs were an important part of a country’s economic restructuring, equity securities that were brought to the market by means of initial equity offerings frequently were priced to attract investment in order to secure the issuer’s successful transition to private sector ownership. In addition, these enterprises generally tended to enjoy dominant market positions in their local markets. Because of the relaxation of government controls upon privatization, these enterprises typically had the potential for significant managerial and operational efficiency gains, which among other factors, increased their earnings due to the restructuring that accompanies privatization and the incentives management frequently receives.
The emerging markets, home to 84% of the world population and 78% of the world’s land mass continued to be compelling. The dramatic economic and political developments were sweeping across the developing nations of Asia, Latin America and Europe. These government were embracing policies of deregulation, capitalism and free markets. They were lowering inflation, reducing budget deficits, selling off state-owned industries, reducing trade barriers and opening up to foreign investments. According to the World Bank, developing nations account for 47% of the world economy, yet represent only 7% of world stock market capitalization. Investors would be wise not to ignore that half of the world that is far outpacing the growth of the industrialized half. In addition, emerging markets offered superior growth potential at a valuation discount.
Historically, domestic investor demand, not foreign demand, has been the force behind past performance of developing stock markets. For instance, in 1993, foreign equity investment in developing stock markets amounted to $60 billion or less than 1% of the estimated total assets in the world. In the 90s of the 20th century there has been a sharp increase in investment in overseas markets in general and emerging markets in particular. But as global investors become aware of the tremendous opportunities in developing stock markets, the flow of new equity capital increased even further in developing countries thanks to privatization.