Stocks in developed nations took 17 months longer than emerging markets to erase losses spurred by Lehman Brothers Holdings Inc.'s 2008 bankruptcy, recovering after the Federal Reserve took steps to stimulate growth.
The MSCI World index of 1,660 companies in 24 developed countries such as the U.S., U.K. and Japan rose as high as 1,283.68 on Thursday. The gauge surpassed its closing level of 1,283.14 on Sept. 12, 2008, the last session before Lehman's collapse caused a 46% drop through March 2009.
Developed nations are lagging behind the 21-country MSCI Emerging Markets index, which finished its recovery in August 2009 and rallied another 31% after stocks from Brazil to Turkey advanced amid faster growth. As confidence in the U.S. and European economies waned, Fed Chairman Ben S. Bernanke suggested four months ago that he might purchase bonds, triggering a global equity rally and speculation that he will reignite inflation.
The “new economic leadership is reflected by emerging market stocks, which recovered to pre-Lehman levels much faster than have developed stock markets,” said James Paulsen, chief investment strategist at Wells Capital Management, which oversees about $340 billion. “Economic activity in these regions did not slow or contract as deeply and have recovered much faster.”
Emerging economies may expand 6.4% in 2011, almost three times the 2.2% rate for developed nations, according to the International Monetary Fund. Government debt will probably amount to 37% of emerging market gross domestic product next year, and budget deficits will be 2.9%, compared with levels of 101% and 6.7%, respectively, in advanced nations, the IMF predicts.
The MSCI World index surged 86% through Wednesday since sinking to a 12-year low of 688.64 in March 2009. Stocks have rallied around the world as central banks kept interest rates near record lows while governments spent trillions of dollars to spur growth, boosting confidence in the global economy and helping equity markets overcome the worst financial crisis since the 1930s.
“We were priced for the end of the world until mid-March 2009,” said Komal Sri-Kumar, who helps manage $111 billion as chief global strategist at TCW Group. “So when Armageddon didn't happen, we had a significant jump from the lows. Add to this massive fiscal and monetary stimulus, the continued healthy growth in emerging markets and Bernanke's quantitative easing speech at the end of August.”
The Standard & Poor's 500 index surged 20% through Wednesday since Mr. Bernanke's Aug. 27 speech, when he foreshadowed the second round of quantitative easing. The central bank said in November it will buy an additional $600 billion of bonds through June, expanding on record stimulus of $1.7 trillion in asset purchases. The S&P 500 erased its loss on Dec. 21.
The MSCI World index must rise more than 30% to exceed its record high in October 2007, when markets rallied as the U.S. economy expanded at the fastest pace in a year and a half and the Fed cut its target overnight lending rate to prevent a recession. A contraction began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research.
Financial stocks have lost 20% as a group since Lehman's failure, the most among 10 industries, led by an 89% slump in Bank of Ireland. Lenders were dragged down by $1.7 trillion of global bank losses and write-downs tied to property loans during the credit crisis that began with mortgage defaults and accelerated with the collapse of Lehman in 2008.
