What a day. After one of the worst weeks in global economic history, markets across the board soared after the news of that the G-7 will be putting in a coordinated bailout effort. Brazil was up 14% (the iShares MSCI Brazil fund EWZ was up 26% for the day), India was up 7%, and according to the Emerginvest heat map, China’s Shanghai A share’s composite was up 3.6%. However the global rally didn’t stop simply with the BRIC countries (Russia didn’t get the invitation apparently), indexes across Latin America, Asia, Africa, and Eastern Europe felt the relief: Czech Republic rose 11%, Hungary 6%, Saudi Arabia 10%, Dubai 11%, Chile 13%, and Mexico 11%.

One of the best indicators was that the iShares MSCI Emerging Markets Fund (EEM) jumped 23%.
For me, it was a tremendous relief to see the rebound today. But we – as in the globe – are not out of the woods yet.

This kind of rebound helps to reinforce how monumental last week was in terms of losses. My firm belief (and I’m sure there are volumes of documented medical evidence of this from people far more qualified than I in human psychology), is that the human psyche classifies news into neat categories, and once it exceeds those categories, people don’t know how to process it immediately so they mentally shut down. Clearly, somewhere around Tuesday or Wednesday of last week, most common investors already surpassed their classification of “extremely bad,” so they mentally shut down, not knowing how to process the magnitude of losses occurring (which I believe contributes heavily to the sell off panic).

That kind of tectonic shift in the economic landscape cannot, and will not, be solved by a single day’s rebound. It is still a heavily volatile market place, and I still expect to see losses occurring in varying sectors/countries around the globe.

However, it does signal good news to investors that hopefully the market will slowly shift from being the fear-dominated market place it is now, to a more rational one. In the wake of fear-induced sell offs worldwide, there are tremendous bargains to be had in almost every corner of the globe. An article from MarketWatch called: “Stocks, currencies in emerging markets rally,” describes how “Morgan Stanley upgraded Monday emerging market equities to the maximum overweight of 10% above the benchmark, saying that the catalysts for a rally are the action by the Group of Seven countries to underpin systematically important financial institutions as well as the oversold conditions.”

They go even further to state that “100% of all GDP growth worldwide in 2009 will originate in emerging markets.” I’m not sure if I can buy into the magnitude of that statement, but it certainly is an interesting point that Morgan Stanley predicts the world economy to be virtually entirely emerging-markets led for 2009. They at least make a significant case for bargains due to massive overselling, evidenced by most EM funds and worldwide indexes as investors scrambled to pull their money out of their “risky” emerging market assets when the developed markets started to tank.

In short: The near future will still be volatile, but today was a great first step in stopping the downward spiral. And to close with a metaphor, I think now is a good time to look to emerging market stocks – just like the best sea shells are washed up on the beach after a hurricane.

Last 5 posts by Jonathan O'Shaughnessy

• Is It Finally The End Of The Bear Market? - March 17th, 2009
• Are We There Yet? - March 10th, 2009
• New Wave of Investing Opportunities: France - March 10th, 2009
• The Fall of Japan as a Safe-Haven: Fastest Contracting GDP in 35 Years - February 18th, 2009
• One of the Best Markets of 2008 & Weekly Highlight: Costa Rica - December 30th, 2008