Returns from emerging markets equities (EMEs)
fail to outperform developed markets equities, a study into
long-term trends has found.
The Truth about Investing in Emerging
Markets found that EME portfolios with 3-year and 5-year time
horizons did not consistently outperform developed market equities
– either on a total return or a risk-adjusted basis.
Go deeper with GlobalData
The study also showed that a 10-year
portfolio, which entered the market from 1988 onwards, would have
only outperformed an emerging market index 27% of the time, on a
risk-adjusted basis.
In comparison, a 3-year portfolio could expect
to outperform developed markets 62% of the time for the same
period.
All comparisons are based on the MSCI Emerging
Total Return Gross Index versus the MSCI World Total Return Gross
Index.
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By GlobalDataResearch counters conventional
wisdom
The research runs contrary to many private
banks’ investment strategies.
For instance, Coutts & Co said over the
longer term equity valuations in China looked historically
attractive and that 2012 would prove a good year overall for
Chinese equities as some negative factors fade.
However, Coutts said at the moment it favours
renminbi-denominated corporate bonds over equities until the global
economic outlook stabilises with equity gains likely to be
concentrated toward the second half of the year.
Emerging market outperformance “a
misconception”
Capital Generation Partners (CapGen) founding
partner Ian Barnard, who commissioned the research, said that EMEs
delivering outperformance is “a common misconception”.
“For many, this is based on the fundamental
assumption that GDP growth is an indicator of future stock market
returns. This research demonstrates that not only is this
assumption incorrect, but that outperformance has been limited to
date, particularly among longer-term investors,” he added.
However, Barnard sees the benefit of having
EMEs in a balanced portfolio, where they could act as
diversifiers.
The study was conducted by Masters of Finance
students at the Judge Business School in conjunction with
London-based CapGen, which has $2bn assets under advisory.
