Why have the returns from emerging markets investing been so poor?
I was looking at the returns from the MSCI EM Index since 2000 and they were 7.7% compared to the SP500's annualized returns of ~10%. Why are the returns from EM lower when they represent faster growth economies?
I know there's issues with country macro, currency rates, governance, etc but do these issues outweigh the inherent benefits of investing in EM and make the asset class generally a poor choice to invest your money? It seems to me like you are taking on higher risk for lower reward.
I mean I think that this is all relative, a better question would be "Why do US companies have abnormal long term returns"
And the answer seems pretty clear 1) imperialism and world influence during the 20th century that set up the average american in the 60's infinitely better than any other citizen worldwide by exploiting other countries 2) american companies being able to run basically unchecked and grow into massive monopolies with pricing power over consumers who can then lobby to further increase their power 3) price gauging and taking advantage of the average consumer and draining Americans savings/ keeping wages low and continually raising prices every year (eg lowest savings rate atm with S&P at ATH & consumers swimming in debt)
The returns only seem low because theyre in the shadow of these abnormal american returns. The question then becomes how long can the American consumer endure the bleeding from corporations or until the government steps in.
Some quick thematic answers. A better answer would come on a country-by-country / asset class dependent basis.
Investing in EM is more idiosyncratic. Broad indices are tricky.
1. Corruption / Corruption Adjacent
- Political Corruption/Interference. Nationalization.
- Insiders get the best deals because of relationship business. Westerns are often the dumb money.
- Bullshit financials / fraud
2. Underdeveloped Financial Markets (Negative Feedback Loops)
- Government financial policy is less steady due to political instability (etc.)-> Government paper carries a higher interest rate than DM -> corporate paper is even wider than this -> financing comes at a high price -> less growth -> government financial policy is less steady (repeat).
- Foreign investors piling in at the same time creates bubbles that do long-term damage (see 1997 Asian currency crisis).
- "Flight to quality" means that EM get capital outflows at arguably the worst time (e.g. global financial meltdowns).
- Low liquidity -> Less incentive to go public / less regulation -> Low liquidity
3. Dominant industries
- "Resource curse" for example. Low industry diversification for certain countries.
- Emphasis on cheap labor / commodity industries may not be the best for long-term growth; a big part of the US stock market story is from tech companies. DM countries have better R&D so naturally more tech exposure. Commodity industries are self-defeating in some sense (population is poor -> labor is cheap -> lots of profit from cheap good exports -> population becomes less poor -> labor is less cheap -> goods become more expensive -> less profit growth).
Imho markets are far from efficient in these regions (corruption, lack of proper governance, insider trading, liquidity issues) so of course these broad indices measure nothing and are not useful benchmarks. One of the few AM areas where an active approach is still warranted and adds value.
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