Emerging market returns have been a cause for concern over recent weeks but by taking a broader perspective, investors may be able to take advantage of the volatility that is inherent in this sector.
Recent analysis by research house Lonsec reveals that while emerging markets experience strong bouts of volatility they have also produced significant real returns over the long term. The below chart compares the MSCI Emerging Market Index, which tracks a basket of emerging market indices, with the standard MSCI World Ex Australia Index, which tracks developed market indices.
The chart reveals that while the emerging market index has experienced more volatility it has also produced higher returns over the past 20 years.
Emerging versus developed—growth of $10,000 over 20 years
Source: Lonsec, Bloomberg
Performance to 31 August 2018
It is important to remember that the phrase ‘emerging markets’ captures a large number of diverse countries. While Turkey and Argentina have suffered from trade related uncertainty, political risks and a rising US dollar, other emerging economies are powering ahead.
For example, India is still the fastest growing major economy in the world. The relationship between GDP growth and share market performance is imperfect with rising GDP not necessarily translating to strong investment returns. However, in India’s case share market performance has been reasonably correlated with GDP growth, indicating that it is relatively sustainable.
As a result, the broader emerging market index often has countries that are outperforming, and therefore balancing, laggards. This may produce more volatility but not necessarily lower returns.
Indian equities performance versus GDP growth
Source: Lonsec, Bloomberg
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