It’s been a fairly bumpy ride lately for so-called emerging markets – the markets of 21 countries including such burgeoning nations as Indonesia, Turkey, China, India, Russia, Brazil, Korea, Malaysia and Poland. As at 12th May 2014, the MSCI Emerging Markets index showed an annualised return of just 1.31% for the year (7.09% p.a. for 5 years, 9.19% p.a. for 10 years).
That said, it’s not all lacklustre news in recent times – some markets have performed significantly better than others. Latin American emerging markets returned 5.74% in the year to 12th May; Jordan Egypt Morocco topped the list at 18.7%, while near the bottom of the table emerging markets in South East Asia turned in a disappointing -11.41% for the year.1
‘Emerging markets’ as a group tend to show a greater degree of volatility than the ‘developed’ markets such as the US, UK, Germany, Japan and Australia. Greater volatility means greater risk - and greater risk provides the opportunity of greater returns, or larger losses. However over the longer term of say, ten years plus, these higher risks can produce very attractive average annual returns.
According to Bloomberg and van Eyk Research, the average annual historical return for emerging markets since 1988 to end March 2014 was 13.37%. This compares to 14.35% for Australian large caps, 11.43% for developed (international) market large caps and 7.23% for developed (international) market small caps.2
Despite the variance in short term returns from the markets of individual emerging nations. The April 2014 Investment Outlook Report prepared by van Eyk says that more recently, “emerging markets have exhibited relative strength compared to developed equity markets. Furthermore, emerging markets have been firm as commodity prices have stabilised. This indicates stronger growth prospects”3 – which is always welcome news for investors.
1 Source – MSCI Inc
2 Australian large caps and developed market (ex Australia) large caps measured from January 1972 to March 2014. Developed market (ex Australia) small caps measured from January 1995 to March 2014.
3Source – van Eyk Investment Outlook Report Australia April 2014