Emerging Markets Letdown

March 02, 2011

New numbers from S&P show big differences in developed and emerging market performance.

S&P Indices sent me an email recently with some fascinating data. It pulled together year-to-date numbers on developed and emerging world equity markets, showing how different countries performed in the first two months of 2011.

The data are surprising. One of the big investment themes of 2010 was the surprising outperformance of emerging markets equities. In particular, BRIC—Brazil, Russia, India and China—was the gateway to strong investment profits for those who moved in. Pundits everywhere proclaimed the surge would continue this year.

 

S&P Global Broad Market Index (BMI) Global, Feb. 28, 2011
Developed Markets
BMI Member 1-MONTH YTD 3-MONTH 1-YEAR 3-YEAR
Global 2.76% 4.13% 11.92% 20.66% -4.57%
Global Ex-U.S. 2.24% 2.99% 11.27% 19.47% -10.00%
Developed 3.19% 5.28% 13.33% 21.00% -4.80%
Dev Ex-U.S. 2.94% 4.91% 13.82% 19.81% -11.58%
Canada 7.16% 7.02% 15.28% 33.01% 6.24%
Norway 6.82% 5.65% 24.94% 29.88% -13.59%
Ireland 5.55% 7.43% 21.83% 4.12% -55.23%
Japan 4.50% 4.74% 13.07% 15.77% -8.63%
Australia 3.86% 1.08% 12.17% 19.61% -3.23%
United Kingdom 3.83% 5.78% 13.78% 21.49% -14.76%
France 3.56% 10.70% 20.38% 15.60% -16.86%
United States 3.46% 5.69% 12.80% 22.39% 3.54%
Netherlands 3.43% 7.18% 19.07% 16.92% -16.47%
Germany 3.22% 7.36% 15.49% 28.71% -14.17%
Switzerland 2.91% 2.13% 12.05% 14.91% 1.36%
Denmark 2.72% 5.47% 16.44% 31.30% -4.58%
Italy 2.68% 13.75% 24.12% 8.42% -39.10%
Belgium 2.60% 4.95% 11.12% 9.35% -39.36%
Portugal 2.31% 8.57% 14.89% 6.79% -33.83%
Austria 1.26% 3.09% 19.24% 22.66% -30.98%
Greece 1.16% 13.20% 16.41% -22.10% -68.84%
Spain 1.00% 13.56% 24.48% 4.44% -30.17%
Luxembourg 0.17% 0.37% 16.55% 5.42% -37.85%
Sweden -0.07% 3.41% 15.02% 37.03% 11.88%
Israel -1.84% -5.44% 1.82% -1.28% 4.62%
New Zealand -1.96% -1.64% 3.74% 10.23% -24.20%
Hong Kong -3.48% -2.14% -1.45% 22.56% 4.94%
Finland -4.21% -0.82% 11.04% 10.24% -41.46%
Singapore -4.96% -5.46% -0.57% 17.71% 2.63%
Korea -6.64% -4.21% 6.03% 27.28% -1.79%

 

That didn’t happen. As S&P’s new data show, emerging markets have consistently underperformed since the beginning of the year. Instead, the new global investment story is one about the rebalancing of performance toward developed market equities—and some of that performance comes from markets that suffered at this time last year.

So far in 2011, developed markets are up more than 5 percent, with a 3 percent gain in February alone. This outperformance comes from surprising sources—old-world European countries that traditionally have hidden behind other strong performers.

Italy boasts gains of almost 14 percent so far this year, leading the charge from developed markets, while Canada shows the strongest gains in February with over 7 percent. Countries like France, Greece and Spain all have double-digit performance stats—Spain posts a 13.5 percent performance, with Greece right behind it at 13.2 percent. France and Portugal round out the top five, returning almost 11 percent and nearly 9 percent, respectively.

Portugal! It’s not often you see talking heads like me expound on the strong returns from Portugal, but here we are.

One thing the data spell out: Don’t discount any market out of hand. Historical performance doesn’t predict future results. Investors betting on the rise of traditional hotbeds of performance like Brazil and China have watched those bets fall short. Those that kept their eyes on Europe are likely much happier.

That’s not to say that all the emerging markets are down, however. Even though many of the much-hyped markets sag under the weight of high food prices, bank policy tightening and, in Egypt’s case, geopolitical issues, there are some surprising performers in the bunch. The data here might be even more important to analyze ...

 

 

S&P Global Broad Market Index (BMI) Global, Feb. 28, 2011
Emerging Markets
BMI Member 1-MONTH YTD 3-MONTH 1-YEAR 3-YEAR
Global 2.76% 4.13% 11.92% 20.66% -4.57%
Global Ex-U.S. 2.24% 2.99% 11.27% 19.47% -10.00%
Emerging -0.45% -4.00% 2.12% 18.32% -2.46%
Chile -3.35% -11.57% -7.56% 27.13% 38.25%
Peru -0.15% -8.49% -3.37% 43.84% 32.78%
Philippines -0.32% -8.37% -0.29% 44.18% 25.14%
South Africa 6.00% -6.78% 6.14% 30.25% 19.65%
Thailand 4.45% -5.34% -2.24% 46.45% 17.03%
Malaysia -1.87% -0.37% 5.29% 34.05% 12.92%
Indonesia 5.86% -4.16% -0.04% 32.79% 10.16%
Mexico 0.22% -2.48% 2.87% 24.64% 6.17%
Turkey -3.15% -11.52% -12.56% 18.18% 1.41%
Taiwan -8.22% -5.62% 5.61% 23.56% 1.28%
Brazil 2.67% -1.99% 4.42% 11.91% -2.02%
China -1.51% -1.67% -2.42% 11.26% -4.86%
India -2.51% -14.99% -9.46% 5.23% -14.65%
Morocco 2.38% 2.99% 10.48% 16.22% -18.22%
Russia 5.55% 9.05% 21.22% 35.03% -20.17%
Hungary 4.37% 16.67% 26.26% 8.86% -22.56%
Poland 0.84% 2.67% 12.87% 20.74% -25.48%
Czech Republic -1.72% 6.72% 17.48% 9.23% -30.29%

 

Over the past 12 months, emerging markets equities as a segment brought in over 18 percent gains. And when you dig deeper, the BRIC countries look good. Russia turned in 35 percent performance in the past year, with Brazil at almost 12 percent, China at just over 11 percent and India over 5 percent. In fact, every country S&P tracks as an emerging market provided positive gains over a one-year time frame.

Everything goes topsy-turvy three years out, however, with extremely volatile performance across the board. Russia, the strongest market previously, turns in an abysmal -20 percent return. India’s story is much the same: an almost -15 percent performance over the longer time period. Aren’t these the same markets we’re supposed to be jumping for joy over? If you’re in a buy-and-hold mindset, they’re certainly not winners.

Here’s where it becomes much easier to separate the wheat from the chaff. The countries that work best for long-term investors are vastly different from what the media focuses on. Chile and Peru boast big numbers, with 38 percent and 33 percent gains, respectively—in spite of slight, short-term negative numbers. From the long-term view, South Africa also looks like a strong contender; S&P’s data show gains of almost 20 percent there over three years, as well as a 6 percent increase in February.

The point here is that patient investors have more options available if they look farther out. It’s easy to follow the hype and think a play on China or Brazil is the right move. But investors need to evaluate every option. Judging from S&P’s data, the paradigm for how investors should be looking at emerging investments is starting to shift. I’m extremely interested in revisiting this data in six months—I can’t wait to see what changes.

 

 

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