In 1998, Russia’s economy collapsed. The Russian government defaulted on its foreign debt obligations while the ruble went into a freefall.

In Asia, regional governments exhausted their central bank reserves defending overvalued currencies. This all lead to the destruction of credit that began the summer of 1997.

This was exactly the time to aggressively buy emerging markets, and eventually, commodities. Oil prices bottomed north of US$10 a barrel in late 1998.

As we all know, this story changed quickly. Aided by rising prices for commodities, emerging markets went on to post the most impressive gains in the last 10 years. And it’s not surprising.

After all, the emerging markets are home to the world’s fastest-growing economies supported by bulging trade surpluses, booming foreign-exchange reserves and in most cases, healthy balance sheets.

There’s no doubt that in the longer term, emerging markets will become larger and therefore dominate global stock market performance. Growth rates will certainly continue to outpace the major markets for years to come. But a marked slowdown in exports and a prolonged commodity slump might also crimp the near-term prospects for emerging markets.

It is possible that after years of huge triple-digit gains the emerging markets can lag the major markets. That’s especially the case after the crippling declines we’ve seen in the financial stocks. A recovery, however short-lived, will boost the value of U.S. equities because financials comprise more than 15% of the broader market and more than 20% across Europe.

Financials Will Dominate

History strongly suggests that financials will eventually form a bottom and lead another broad rally for major market equities.

It might be hard to make a long-term case for financial services as industry business models have radically changed and have been compromised by the credit squeeze. Still, a major advance in emerging markets can happen even for a short period of time.

I’m certainly not long-term bullish on U.S. or European stock markets. The smart money will remain committed to emerging markets, including new frontier markets like Vietnam, Bangladesh, and Botswana among others. Plus, China, India, and Brazil are superb growth stories for the next 10 years.

But it might be time to start looking carefully again at U.S. stocks as foreigners return to positions that have been severely slumped over the last few years. A stable dollar would go a long way in solidifying this possibility.