Emerging markets vs SP 500

[Totoro]

Quote:

Originally Posted by 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?

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]

Quote:

Originally Posted by Totoro 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]

Quote:

Originally Posted by 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 ...

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.