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The Evolution of Emerging Markets (Part 1)

Thirty years ago, emerging markets stocks represented less than 1% of the world’s investable equity market capitalization

Ben Johnson 30.11.2017

Per MSCI, emerging-markets stocks made up about 11.6% of the global stock market (using the MSCI All-Country World Index as a proxy) as of the end of September. Thirty years ago, these stocks represented less than 1% of the world’s investable equity market capitalization. These markets are dynamic by defini­tion. They have changed dramatically in the past three decades, and the pace of change has only accelerated in recent years. Here, I’ll look at emerging-markets stocks’ long- and short-term performance, the most recent phase in their ongoing evolution, how their makeup may evolve in the future, and what this all might mean with respect to portfolio construction.

Back in the Saddle
The MSCI Emerging Markets Index was launched on 1 January 2001. From its inception through the end of September, the index’s annualized return amounted to 9.89%, versus 4.99% for its developed-markets coun­terpart, the MSCI World Index. Though these headline performance figures are compelling, they belie the gut-wrenching volatility that has characterized this span. During this period, the emerging-markets index’s standard deviation of monthly returns and maximum drawdown were 22.07% and 61.59%, respectively. The comparable figures for the MSCI World Index were 15.19% and 54.03%, respectively. Emerging markets’ path to greater absolute returns has been a winding one.

Recent years have been particularly taxing for inves­tors in emerging-markets stocks. From the time that the emerging-markets index’s cumulative performance peaked relative to developed markets in October 2010 (see Exhibit 1) through the end of 2016, the MSCI Emerging Markets Index fell 1.1% on an annualized basis, while the MSCI World Index generated annual­ized gains of 8.74%. But after almost seven lean years, emerging-markets equities have re-emerged in 2017. For the year to date through September, the emerging-markets index increased 27.78%, while its developed-markets counterpart rose 16.01%. Digging into the drivers of the benchmark’s year-to-date performance yields some interesting insights into how its complexion has changed in recent years.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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