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Emerging market equity performance suffers setbacks

February 12, 2014

Qatar and the United Arab Emirates will transition from being classified as frontier markets to emerging markets status in May 2014. The Credit Suisse Global Investment Returns Yearbook 2014 explores emerging market investment from the point of view of a long-term investor.

After exceptional performance during the first decade of the 21st century, emerging market equities have recently suffered setbacks, say the London Business School authors of the Credit Suisse Global Investment Returns Yearbook 2014.

The authors, Elroy Dimson, Paul Marsh, and Mike Staunton of London Business School, explain: "The first article in the 2014 Yearbook presents an evidence-based view of the performance of emerging markets. We review the long-term returns from investing in 85 markets around the world, 23 of which were developed markets, while 62 were developing markets either emerging or frontier markets."

"The long-term (114-year) equity risk premium for a US investor in emerging markets was 3.4 per cent, as compared to 4.3 per cent for developed markets. However, this underperformance can be traced back to the distant 1940s and we expect superior returns in the future, in line with the higher risk of emerging markets."

The authors also look at the incidence of financial crises in both emerging and developed markets. They conclude that, "Despite the popular conception, contagion is not the norm during emerging market crises. In contrast, crises originating in developing markets have proved far more contagious."

In terms of gains from diversification, the authors conclude that: "There are continuing benefits to investors from looking at both developing and developed markets as part of a broader effort to diversify portfolios on a global basis. The recent turn of sentiment against emerging markets in particular seems overly pessimistic from the perspective of a long term investor." They also point out that the value effect has been strong both within emerging markets and as the basis for a successful rotation strategy between markets.

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Source: CPI Financial

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