Emerging Markets Are For Real

December 01, 2010



Of course, emerging markets bets have been riskier. Here’s a chart of the same two indexes’ 30-day volatility over the last 10 year:

Emerging Markets EAFE Volatility


Both indexes have had periods of substantial volatility and, indeed, when the you-know-what really hits the fan, emerging markets do spike higher. But the day-to-day expectation of the two indexes is remarkably similar.

But none of these charts is what really drives investors. After all, most investors focus on performance.


Emerging Markets EAFE Performance


The correlation here is easy to see, as is the spike in volatility, which drove emerging markets down hard during the financial crisis. However, they also recovered faster, more violently and to better effect.

Clearly the pattern of returns here is substantially different, and different is what investors are looking for. The 300 percent returns during the “lost decade” don’t hurt either—the S&P is up just 8 percent over this same time frame.

The premise of emerging markets isn’t lazy. Like all indexes, emerging markets indexes are simply a pooling shortcut, allowing investors to express an opinion without picking stocks. In this case, that opinion is “developed economies are mired with difficulties, less-developed economies are the place to be.”

And let’s be honest, those investors have been right.


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