Have Emerging Markets Really Outperformed?

Published in Investing Strategy on 10 September 2010

Er, yes.

If I had a penny for every time I've heard somebody claim Western economies are finished and the real future growth opportunities lie in emerging markets I'd have £2.37 by now.

It's a modern truism that Asia and emerging markets will outperform as global financial power shifts from West to East, but is it actually true? And by true, I mean, do recent past performance figures suggest this has actually been happening. Most people assume emerging markets have delivered higher returns than the West, but what do the figures actually say?

Think global

Let's start by looking at various global indices, comparing the developed and emerging worlds, using figures from Standard & Poor's showing discrete annualised returns over five and 10 years, with dividends reinvested. These figures show total returns quoted in US dollars, so you have to discount currency fluctuations.

Region5 years10 years
S&P Europe1.7%2.7%
S&P US-0.5%-0.9%
S&P Asia-Pacific2.2%1.9%
S&P Asia Pacific Emerging14.6%8.2%
S&P European Emerging5.7%16.1%
S&P Latin America21.5%18.4%
S&P Mid-East and Africa11.8%11.6%

Well that's pretty straightforward. The emerging markets have it, trouncing markets in the developed regions of Europe, the US and Asia-Pacific.

But what about individual countries?

Country5 years10 years
South Africa11.9%14.9%

Oops, they did it again

As you can see, the BRICs deserve all the bouquets that have been thrown in their direction. The UK, US, Japan and even export powerhouse Germany simply can't keep up.

I haven't included countries such as Indonesia, Korea, Malaysia, Philippines, Thailand, Chile, Colombia and Peru in the table, but they have all been far, far better places to invest your money over the past decade than the developed world.

So the next time somebody says stock markets have delivered negative returns over the past decade, you can say yes, that may be true in the West and Japan, but it isn't elsewhere in the world. Investing in equities still makes you money, provided you set foot overseas. It's been better to travel.

Can a star beat the trend?

Finally, let's see how the best unit trust fund manager in each sector performed. Can a star manager really make the difference? Using figures from Morningstar, I have searched for the best-performing fund over five years, and shown its annualised percentage growth (before charges) over both five and 10 years. I have only included funds with a 10-year track record (except in Russia, where none are available).

Fund5 years10 years
SVM UK Growth8.7%3.6%
BlackRock Continental European9.8%2.9%
Gartmore US Growth5.6%-2.2%
Gartmore China Opportunities22.6%12.9%
Scottish Widows Latin American23.9%15.6%
Neptune Russia & Greater Russia18.9%N/a
Aberdeen Emerging Markets21.4%14.9%

As you can see, even the very best fund manager in the West has failed to defy global market trends and therefore trails the developing world. This suggests that in the long run, what matters most is the market you are in, rather than who is running your money. Just like a big-name Hollywood star can't save a turkey, nor can a star fund manager buck an ailing sector.

East is best

I was hoping to prove something surprising here, but I haven't. Emerging markets have thoroughly hammered the West over the past decade, and even if the odd lone manager has staged a courageous stand, they have been overrun in the end.

But we all know that past performance is no guide to the future. Given the cyclical and downright ornery nature of stock markets you might see this as a sign that the West will soon have its turn. 

Personally, I doubt it, but you can start that debate below. Just remember, every time somebody says emerging markets are the future, I get a penny. And I know where I'm investing it.

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F958B 10 Sep 2010 , 12:55pm

Emerging markets have outperformed, but the risk is higher.
Efficient markt pricing would suggest that higher-risk assets ought, on average, to deliver superior long-term returns but with much greater volatility.

jerryrc 10 Sep 2010 , 2:52pm

How much of this 'out-performance' is corporate profits growth and how much of it is due to large investor inflows pushing up share prices? A share price increase is not 'real' performance unless its matched by the fundamentals (or is catching up with fundamentals).

Be wary about overpaying now for future growth too....

curedum 11 Sep 2010 , 5:18pm

100 years ago the USA was an "emerging market" economy.

Whenever there are large numbers of educated young people prepared to work hard to better themselves you'll get a vibrant, expanding economy. This is why global growth in the 21st centuary will be centred on China, India and Brazil.

BarrenFluffit 13 Sep 2010 , 11:15am

So an effectively diversified portfolio would have performed better than one which was over exposed to home markets.

mcduell 17 Sep 2010 , 11:48am

I agree with the suggestion's about the east fund'srecommended, I like the Gartmore fund especially.

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