While asset management companies such as Goldman Sachs and Lazard have been constantly advocating investors to look at emerging markets as a key driver of growth in the next seven to twenty years, columnist Howard Gold begs to differ.
According to him, since the bear market bottom in 2008-09, the iShares MSCI Emerging Markets Index has surged 175% while the Vanguard Total Market Index which broadly tracks US stocks has jumped 350% and the S&P 500 has gained about 270%, putting to rest conventional wisdom of investing in emerging markets.
A deeper insight into the indices, however, shows that the issue may not be with the economies or the stock themselves, but the index composition which is more tilted towards Chinese shares, thereby not representing the broad emerging market economies or their equity markets to a large extent.
Howard cites higher volatility as another risk with investing in emerging markets. Based on his analysis, the standard deviation in EM stocks in the last 30 years to August 2018 was more than 22% compared to 14% for the S&P 500, making EM equities 50% more volatile compared to US stocks.
With China’s markets opening up to institutional investors, the MSCI and the FTSE Russell are expected to further load the EM indices with Chinese stocks, taking away the benefits of diversification, even as the correlation between the EMs and the developed markets intensify.