Emerging markets vs SP 500

[Blue Collar Guy]

Just saw a chart on TV, EM vs SP 500 they are in a dead heat since 1990(when the EM started). They are only outperforming in the last year. Interesting. Maybe this is what John Bogle means with just buy the US,

 

[LOL!]

Maybe one should rebalance between them?

How many people on this forum have held either one since 1990? Yes, I thought so.

 

[MichaelB]

Which EM fund is used for the comparison? EM hasn't been around that long - the older funds date back to the late '90's.

 

[target2019]

https://engineeredportfolio.com/201...torical-comparison-of-international-equities/

I saw a chart on the internet, and it told me that when you get in and how long you hold on is important.

 

[UnrealizedPotential]

One may come out ahead in the long run investing in EM. Speaking just for myself, even if a certain EM beats the SP500 say over a 20 year period, the amount of volatility to get there would be incredible and I would worry too much.

Being able to sleep at night should count for something. I will take the more boring, and possibly less rewarding US stock market.

 

[DrRoy]

One may come out ahead in the long run investing in EM. Speaking just for myself, even if a certain EM beats the SP500 say over a 20 year period, the amount of volatility to get there would be incredible and I would worry too much.

Being able to sleep at night should count for something. I will take the more boring, and possibly less rewarding US stock market.

+1

 

[MichaelB]

These comparisons going back decades are apples to oranges IMO. The MSCI EM Index includes 24 countries, and not all of them even had stock exchanges in 1980.

Emerging markets was first defined as an asset class in the mid-90's when the most common index - MSCI - for EM was designed. The largest EM component, China, at 28% of the index, first opened the Shanghai exchange in 1990.

EM is definitely an investable asset class (I have a large equity allocation.) I just think a comparison with the S&P or any other global developed index that dates back that far is, at best, misleading.

Investing in EM is no different than any other equity - it should be based on an expectation of future growth and value.

 

[Blue Collar Guy]

One may come out ahead in the long run investing in EM. Speaking just for myself, even if a certain EM beats the SP500 say over a 20 year period, the amount of volatility to get there would be incredible and I would worry too much.

Being able to sleep at night should count for something. I will take the more boring, and possibly less rewarding US stock market.

The volatility was the point the broadcaster was saying. he said too wild of a ride on the EM to get to the same place

 

[Blue Collar Guy]

Which EM fund is used for the comparison? EM hasn't been around that long - the older funds date back to the late '90's.

I do not have a clue but i did find this.https://markets.ft.com/data/indices/tearsheet/charts?s=MIEF00000PUS:MSI. seems it goes back to 1988, when I did a sp500 overlay comparison its a dead heat.

 

[RobLJ]

I suppose a question is whether they (EM) would smooth returns, particularly in combination with international; if they are non-correlated to the S&P they could be valuable.
In the last decade markets are increasingly correlated, so this point may be less relevant. Myself, I've sold China and Pacific funds when they zoomed, then bought them back, like biotech.

 

[Montecfo]

just so much cheaper than US.

 

[Chuckanut]

The theory is that changing world demographics ( we are getting older, emerging countries are booming with babies) will give them an advantage in economic growth over the next few decades.

In theory.....

 

[YVRRocketSurgery]

I'm not willing to be the farm on EM but I also agree that it's kind of the place to be due to demographics. I currently have about 5% of my portfolio in EM funds but wouldn't mind increasing it to somewhere between 5-10%.

 

[dallas27]

EM is the majority of the world population, the majority of all land, and only 20% of modern finance. They default less than develop market and offer higher yields, and can increase productivity simply by copying other countries without the investment to innovate new things. Why would anyone not be heavy in emerging?

50 us
25 dm
25 em

 

[gerntz]

Just saw a chart on TV, EM vs SP 500 they are in a dead heat since 1990(when the EM started). They are only outperforming in the last year. Interesting. Maybe this is what John Bogle means with just buy the US,

He very well may mean that. But that doesn't speak to next 30 years.

 

[gerntz]

One may come out ahead in the long run investing in EM. Speaking just for myself, even if a certain EM beats the SP500 say over a 20 year period, the amount of volatility to get there would be incredible and I would worry too much.

Being able to sleep at night should count for something. I will take the more boring, and possibly less rewarding US stock market.

I believe in diversifying. Avoiding an investment area due to its own volatility risks being overly exposed in other areas. As 10-20% of equity allocation, EM's added diversity trumps its volatility for me.

 

[NW-Bound]

To compare US stocks to the EM equities, I just looked at the two Vanguard MFs: VFIAX (S&P Index) and VEMAX (EM Index). The latter's inception date is 1994, so I have no data points prior to this.

From 1994 to mid 2000, S&P grew 3.8X while EM grew 1.2X. Huge difference of 3 times!

From mid 2000 to early 2009 (the bottom of the Great Recession), S&P dropped to 57 cents on the dollar, while EM still grew 1.4X after dropping from its high. Huge difference of 2-1/2 times.

From early 2009 to April 2011, S&P grew 1.9X, while EM grew 2.5X.

From April 2011 to Jan 2017, S&P grew 1.9X, while EM became 0.86X (dropped to 86 cents on the dollar). Huge difference again!

From Jan 2017 till now, S&P grew 1.13X, while EM grew 1.26X.

What lies ahead in the immediate future?

PS. I just corrected the erroneous swapping of the performance numbers for early 2009 to April 2011.

 

[audreyh1]

I suppose a question is whether they (EM) would smooth returns, particularly in combination with international; if they are non-correlated to the S&P they could be valuable.
In the last decade markets are increasingly correlated, so this point may be less relevant. Myself, I've sold China and Pacific funds when they zoomed, then bought them back, like biotech.

I believe in diversifying. Avoiding an investment area due to its own volatility risks being overly exposed in other areas. As 10-20% of equity allocation, EM's added diversity trumps its volatility for me.

Exactly! If you are rebalancing EM with other asset classes, then you can turn the "wild ride" to your advantage.

Personally I don't dice that finely and have international and international small cap, some of which may hold EM depending on the fund manager.

 

[target2019]

To compare US stocks to the EM equities, I just looked at the two Vanguard MFs: VFIAX (S&P Index) and VEMAX (EM Index). The latter's inception date is 1994, so I have no data points prior to this.

Try:
https://www.bogleheads.org/wiki/Simba's_backtesting_spreadsheet

The page has a link to the latest spreadsheet discussion, and gdrive link. In it are values for VEIEX going back to 1985. There are many notes in the spreadsheet, so you need to check/understand the myriad of formula.

The makeup of the EM index has changed a lot since 1985. I don't have an analysis, but just looking at China for that period, EM 1985 is a very different pot than EM 2015.

OTH, S&P500 has changed, but it is just one economy.

 

[OldShooter]

EM is the majority of the world population, the majority of all land, and only 20% of modern finance. They default less than develop market and offer higher yields, and can increase productivity simply by copying other countries without the investment to innovate new things. Why would anyone not be heavy in emerging?

Well, maybe because all that information is already included in the prices, plus some behavioral finance-derived growth premiums that will ultimately disappear and cause the sector to underperform. (Ref Jeremy Siegel's "Growth Trap")

Remember, a good company is not necessarily a good investment.The same thing applies to market sectors.

In the end, this discussion is simply about two market sectors and how they compare. No one can predict this. I happily own all sectors, then I don't have to worry about guessing which ones will be winners or losers.

 

[Totoro]

EM is the majority of the world population, the majority of all land, and only 20% of modern finance. They default less than develop market and offer higher yields, and can increase productivity simply by copying other countries without the investment to innovate new things. Why would anyone not be heavy in emerging?

Because emerging markets are not the same as emerging markets companies.

Which are less mature, stable, more prone to corruption, .. while the established players all are in the emerging markets as well.

I'm also puzzled by your 'default less'. Argentina, Zimbabwe, Nigeria, Venezuela, Russia, Ukraine, .. the list is quite long vs. non-emerging (basically, only Greece). Some of these countries defaulted multiple times. Now I know countries != emerging market companies, but surviving in such an environment is very challenging. Never mind that copying isn't always an option. Can't copy a normal telco if you don't have infrastructure, as a simplified example.

 

[OldShooter]

Good job, @Totoro. I actually like your theory better than mine (Post #20)

But regardless of how the EM companies are priced, the bottom line is the same. The players in the market have voted with their money and the result is probably pretty close to the "real" value of the EM market. So the upside has been priced in, the downside has been priced in, and people who actually know the details about the individual companies have made their pricing decisions. There is unlikely to be a golden goose here. It's just another sector with its own opportunities and risks. Caveat emptor.

 

[dallas27]

Because emerging markets are not the same as emerging markets companies.

Which are less mature, stable, more prone to corruption, .. while the established players all are in the emerging markets as well.

I'm also puzzled by your 'default less'. Argentina, Zimbabwe, Nigeria, Venezuela, Russia, Ukraine, .. the list is quite long vs. non-emerging (basically, only Greece). Some of these countries defaulted multiple times. Now I know countries != emerging market companies, but surviving in such an environment is very challenging. Never mind that copying isn't always an option. Can't copy a normal telco if you don't have infrastructure, as a simplified example.

At almost all ratings levels, corp EM bonds have lower default rates than US due to rating agencies treating sovereign ratings as an artificial ceiling for corps no matter how strong the financials.

 

[Totoro]

Well, we were discussing equities, no?

Bonds: While an individual EM company may be more solid in contrast to its equally rated US company, the whole point is that the EM company has a systemic tail risk which is greater than the US company.

Even the most solid company can quickly tank when its geographical surroundings collapse. Ukraine, Greece, Venezuale, Argentina: casualties aplenty. In a non-crisis year this means indeed on average these companies should perform better. Until they don't and implode. It's how the rating system works.

If you are arguing rating agencies are imperfect, no-one is going to disagree with you here I believe. To what extent markets haven't recognized tail risks in the actual yields (both bonds and equities) and may underestimate or overestimate certain risks, that's yet another discussion.

On the whole, I believe indeed EM, both equities and bonds, are structurally somewhat cheaper than they should be. The added volatility though is a big trade-off. It's why I went in EM a bit but not all-in myself (+10%) last year, although I'm reconsidering this with the recent run-up.

All in all, buying Unilever is I think likely as good as a trade-off between safety & returns as the somewhat EM company Carver (Korea) that just got bought by them. Of course, if I really knew the answers ...

 

[dallas27]

Well, we were discussing equities, no?

Bonds: While an individual EM company may be more solid in contrast to its equally rated US company, the whole point is that the EM company has a systemic tail risk which is greater than the US company.

Even the most solid company can quickly tank when its geographical surroundings collapse. Ukraine, Greece, Venezuale, Argentina: casualties aplenty. In a non-crisis year this means indeed on average these companies should perform better. Until they don't and implode. It's how the rating system works.

If you are arguing rating agencies are imperfect, no-one is going to disagree with you here I believe. To what extent markets haven't recognized tail risks in the actual yields (both bonds and equities) and may underestimate or overestimate certain risks, that's yet another discussion.

On the whole, I believe indeed EM, both equities and bonds, are structurally somewhat cheaper than they should be. The added volatility though is a big trade-off. It's why I went in EM a bit but not all-in myself (+10%) last year, although I'm reconsidering this with the recent run-up.

All in all, buying Unilever is I think likely as good as a trade-off between safety & returns as the somewhat EM company Carver (Korea) that just got bought by them. Of course, if I really knew the answers ...

I am simply calling out superior return over risk statistics, with a play on inevitable productivity convergence. EM is so large and pays so well that if someone does have money in EM it just tells me they can't see the numbers.