Exceptional emerging market equity performance suffers setbacks

Landmark study traces emerging market returns from 1900 to 2014

Dubai, UAE, 12 February 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, which is published today, 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%, as compared to 4.3% 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 developed 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.

Published by the Credit Suisse Research Institute in collaboration with London Business School, the 2014 Yearbook examines the investment performance of emerging markets over the last 114 years, and explores trading strategies in the emerging world. It revisits the authors' finding, in their widely-cited book Triumph of the Optimists, that stock returns fail to mirror economic growth, and presents new evidence and explanations for this puzzle.

Giles Keating, Head of Research and Deputy Global CIO for Private Banking and Wealth Management at Credit Suisse, said: “The recovery in developed world economies now appears to be well under way. However, there are concerns that some emerging countries will confront a more challenging future. In this context, the Credit Suisse Global Investment Returns Yearbook 2014 examines the relationship between GDP growth, stock returns and the long-run performance of emerging markets.”

Stefano Natella, Head of Global Securities Research for Investment Banking at Credit Suisse, said: ““At a time when investors are confronted by the prevailing volatility in capital markets, particularly emerging markets, the data in the Yearbook, now stretching back 114 years and spanning 23 countries, provides investors a unique perspective with which to make informed asset allocation decisions.”