Stock Market Development and Performance in the Emerging Economies
The research examined the rapid stock market development throughout the emerging world over the past decade. Some of the key results of the monthly research report include the following:
The speed at which the equity markets in the emerging economies have surged over the past decade is nothing short of breathtaking. After hovering around 20-25% during the better part of the 1990s, emerging market stock market capitalization, as a share of their collective GDPs, almost tripled from the beginning of the century until 2007.
The total market capitalization of emerging market countries has increased approximately ten-fold over the past fifteen years, from less than $2 trillion in 1995 to about $5 trillion in 2005 to approximately $19 trillion by year-end 2010. This compares to a roughly doubling in total market capitalization for the developed markets over the same period. Since the turn of the century, emerging market’s share of global stock market capitalization has risen from 7 percent to a current figure of approximately 30 percent.
The report explores the widely held belief of whether faster economic growth translates into higher equity gains. It finds:
Over the past quarter century (1987-2011), a diversified portfolio of emerging market equities returned an annualized average return of 11% compared to a diversified portfolio of developed market stocks returning an average of 5.3%.
Over the last 25 years emerging market equities have always outperformed developed market equities when emerging economies were growing faster than the developed economies but they underperformed when the reverse was true.
The report concluded that although emerging market equities are probably not the “bargain” they were a decade ago (because the emerging market story is probably already largely reflected in stock prices), if economic growth remained stronger in the emerging markets (than the developed economies) for years and decades to come, they remained a good “long-term” buy.
The report also stressed that investors should remember that they are not buying into economic growth but purchasing real companies whose return may or may not correlate with that nation’s rate of economic growth.