Long-term performance of emerging markets

Hurrah! The latest Credit Suisse Global Investment Returns Yearbook (for 2014) has just been published. This is one of the two essential annual publications for investors (the other is the Barclays Equity Gilt Study – references at the end of this article).

This year’s Yearbook looks at three topics: emerging markets, the relationship between economic growth and stock returns, and a behavioral bias of investors. In this article we’ll look briefly at the first.

Creating a long-term emerging markets index

The first index of emerging markets appeared in 1985; so the first task of the Yearbook’s authors was to back-calculate a longer-term index (from 1900). To do this they observed that in 2010 the general rule the index compilers (i.e. S&P, FTSE, MSCI) followed was that developed markets were defined as those with a GDP per capita above $25,000 (and markets below this level were categorised as emerging).

Inflation-adjusting this threshold, they back-calculated which countries would have been considered emerging in each year since 1900. From this they calculated a weighted index of these stock markets (adding new markets to the index in the years that the historic data became available).

Comparing the performance of emerging and developed markets

From their created index they were able to compile the following chart, which compares the relative performance of emerging and developed markets since 1900.

Long-run emerging and developed market returns (1900-2013)The figures show that the annualised return for a 144-year investment in emerging markets would have been 7.4%, against a comparable return of 8.3% in developed markets. The authors point out that a large reason for the under-performance of the emerging markets was the disastrous performance of the Japanese  and Chinese markets in the 1940s.

Looking at the period from 1950, the performance is a little more what one would expect: the annualised return of the emerging markets has been 12.5% against 10.8% for the developed markets.

The following chart compares the emerging and developed markets performance by decade since 1900.

Emerging and developed markets - returns by decade (1900-2013)The chart highlights the recent volatility of emerging market performance. The decade 2000-2010 was the best decade for emerging markets relative to developed markets; whereas the current decade so far has been the third worst.


We take it as a given that emerging markets are volatile. And the report finds that in 1980 the average emerging market was almost twice as volatile as the average developed market. However, since 1980, emerging market volatility has been steadily falling, such that by 2013 the average emerging market was only 10% more volatile than the average developed market.


The report goes on to study the (increasing) correlation between emerging and developed markets, which thereby reduces the benefits of diversification.

In conclusion, the authors observe that 30 years ago emerging markets made up 1% of world equity market capitalisation and 18% of GDP, today the comparable figures are 13% and 33%. They forecast that these figures will continue to grow – making emerging markets impossible to ignore.



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The collapse of real yields since 2000

The following chart comes from the newly published  The Credit Suisse Global Investment Returns Sourcebook 2013, written by Elroy Dimson, Paul Marsh, and Mike Staunton (first mentioned here).

The chart shows the real yields on inflation-protected 10-year bonds since 2000.

According to the report,

Even 20-year bonds, where they existed, had low real yields; zero in the USA, 0.1% in Canada, −0.1% in the UK, 0.6% in France and 3.4% in Italy. Abstracting for default and convertibility risk, investors, even over a 20-year holding period, will earn real returns of close to zero. For taxpayers, after-tax returns will be firmly negative.

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Country equity capitalisations 1900-2012

Credit Suisse have just released their annual The Credit Suisse Global Investment Returns Sourcebook 2013, written by Elroy Dimson, Paul Marsh, and Mike Staunton.

An interesting chart (below) in the report shows the proportional equity capitalisations of all major markets since 1900.

According to the report,

In 1900, the UK was the world’s largest equity market, followed by the USA, then France and Germany. Japan was then just a tiny emerging market. Early in the 20th century, the UK was overtaken by the USA, which remained the dominant market throughout, save for a brief 3-year period in the late 1980s, when Japan became the world’s largest equity market. At its peak, Japan accounted for 45% of the total market capitalization of our 22 countries. Then the Japanese bubble burst and, by the end of 2012, Japan’s proportion had fallen to just 8%, while the USA still accounted for 51%.


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