More Than A Bear Rally

The key to such a relatively benign outcome is for growth in emerging markets, which currently account for half of global output, to hold up well. Back in the late 1980s, the Japanese economy had become the biggest contributor to global growth, and its stock market in 1989 accounted for half the world's market capitalization. Even then, a sharp fall in Japan's economic growth and its stock market's steep decline did not unravel the global economy. The bears at that time warned of a full-scale capital repatriation by Japanese investors to shore up their balance sheets at home. Such fears proved to be unfounded, particularly because the U.S. economy was in a position to assume the global growth leadership role. Now emerging markets seem to be taking on that status.

So while a mention of the Japanese parallel typically conjures up disturbing images of the three Ds—debt, deflation and disaster—for the U.S. economy with grave implications for the rest of the world, a closer look at history reveals a different outlook. Once valuations become reasonable, policymakers get into the act and another economic bloc waits around the corner to emerge as the global superpower, and the world economy and stock markets can continue to steam ahead. The rising wave of optimism in the marketplace now may turn out to be more than just a brief spring reprieve.

Sharma is head of emerging markets at Morgan Stanley Investment Management.

© 2008