After exceptional performance during the first decade of the 21st century, emerging market equities have recently suffered setbacks, say the
"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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