Reality Check: Most Stock Markets Still Below '07 Highs

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While most of the world's stock markets are still trading well below their highs of 2007, a handful has bucked the trend.

Six, to be precise.

Tunisia, the tiny African nation south of Italy, has been the best performing stock market since 2007. The Tunindex, a 12-year-old index of 45 stocks, is trading 81% above its high for that year, and is up 15% for 2010. Sri Lanka is up 53% since 2007 and 36% this year.

The other four comprise Venezuela, Colombia and Chile— Latin American countries benefiting from a rush to commodity-rich emerging markets—and Indonesia.

The tally of performances demonstrates just how much investors have been favoring emerging markets, and the extent to which they have been willing to delve into frontier markets.

Over the past three years, emerging and frontier markets—those markets considered so small that they don't even fit into the "emerging" category—are down 7.5%, according to MSCI data. The All-Country World Index is down 10.8%.

Emerging-market mutual and hedge funds saw inflows of $17.3 billion in the first half of this year, according to Emerging Portfolio Fund Research. Frontier markets saw inflows of $780 million.

The continued flow of funds into emerging markets, and their outperformance, shows "a big structural shift in markets," that may be long-lasting, said Jerome Booth, head of research at London-based emerging markets specialist Ashmore Investment Management.

Most developed countries are lagging badly.

Of 89 nations, the U.S. as measured by the Dow Jones Industrial Average, which remains 31% below its 2007 peak, ranks 40th. Japan's Nikkei Stock Average of 225 companies, which is down 49% from its 2007 high, ranks 65th. The U.K.'s FTSE 100, down 27% from 2007, ranks 36th.

The best-performing developed market in this list is Canada—which is benefiting from demand for investments exposed to natural resources. Canada's main index remains about 22% below its 2007 high.

The data demonstrate just how difficult it has been for markets globally to recover from the financial crisis. It also shows how widespread the fallout has been.

In many ways, it isn't surprising that some emerging markets are outperforming their more established counterparts. Stocks in these countries tend to be particularly volatile and subject to big swings in investor sentiment.

On average, Latin American countries have performed better in the past three years.

While Venezuela, Colombia and Chile are now above their 2007 highs, Brazil, Argentina and Mexico are among countries close to break-even.

African nations during 2010 have been among the best performers, perhaps benefiting from publicity surrounding the World Cup soccer tournament being played in South Africa. MSCI's Africa index, which includes Tunesia, is up 14% so far this year.

A big shift in investor sentiment toward countries rich in natural resources could have helped some of these African markets. The World Cup may have helped the overall region gain more attention. "The World Cup has been a booster shot," says Clyde Wardle, emerging markets currency strategist at HSBC Holdings.

The nations also may be piggy-backing on a big shift in investor sentiment toward countries rich in natural resources.

Kenya's 20-share benchmark basket is up about 34% this year, though it still hasn't reclaimed its 2007 levels. Nigeria's index is up 22%. Ghana is up 18% this year so far.

"The fundamentals in these markets are strong," says John Chisholm, chief investment officer at Acadian Asset Management. "By default, funds are increasing allocation to emerging markets because nothing else looks incredibly attractive."

Tunisia, whose listed stocks are valued at $9.2 billion compared with the U.S. stock market's $12.2 trillion market capitalization, is popular with some investors who deem other African markets as too expensive.

Shawn Baldwin, chairman of Capital Management Group, an investment management firm that specializes in Islamic finance, says investors have been attracted to Tunisia in part because of its relatively strong economy and geographic advantages through its proximity to Europe.

Some argue that the country is on the cusp of a real-estate boom, making it more attractive.

Both mutual and alternative investment funds focused on Africa saw inflows for the past 43 consecutive weeks, according to data provider Emerging Portfolio Fund Research.

By contrast, flows in the U.S. have been largely negative all year.

The continent's relative resilience to the global financial crisis has helped to draw investments.

Africa is expected to grow 4.5% growth in 2010 and 5.2% in 2011 according to the Organization for Economic Cooperation and Development.

By contrast, worries about other regions are increasing. U.S. economic data has been weak, sparking concerns that the recovery may be stalling.

In the U.S., the Dow is down more 7.1% this year through Friday. It has fallen for the past seven sessions, its longest losing streak since the height of the global financial crisis in October 2008.

While investors' appetite for risk has waned in recent weeks, driving investors out of stocks generally, emerging and frontier markets are still outpacing the performance of developed nations, according to MSCI indexes.

Investors may increasingly turn to emerging markets to escape growing "political risk" they see in developed markets, said Ashmore's Mr. Booth, citing worries about over-regulation of banks, and the potential fallout from the oil spill in the Gulf of Mexico.

"Political populism and protectionism is rising in the developed world," he said. "Political risk premium has been factored into developed markets equities."

Write to Nesil Staney at nesil.staney@dowjones.com

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