(February 12, 2014) – Over the past 114 years, emerging markets have underperformed their developed market peers, but research suggests investors should stay with the asset class for the long term.
Paul Marsh, and his co-researchers at London Business School, looked back at emerging market returns and compared them with developed market equities. Emerging markets had underperformed over the past 114 years, they found, with a risk premium of just 3.4 compared to developed markets’ 4.3.
Marsh explained that this underperformance was largely due to significant crisis in dominant emerging markets—China, Russia—in the early part of the last century, and after 1950 returns were much better.
“After 1950, the risk premium for emerging markets improves by an annual 1.5,” said Marsh, adding that because of the higher beta and inherent risk, these securities should continue to outperform by this rate for the foreseeable future.
“Investors should remember that they are being rewarded for extra risk, rather than better economic growth,” Marsh warned.
Over the past 114 years, emerging markets have outperformed developed markets in six of the 11 completed decades, the academics said, but with huge underperformance in the 1920s and 1940s skewing the overall result.
Investors often got caught up in the “noise” about emerging markets, Marsh said, and should try to concentrate on the underlying data as scaremongering about the asset class had been “overdone”.
“Emerging markets historically have not outperformed but investors can now expect good performance—but not to shoot the lights out,” he said. Investors should consider the risk/reward characteristics of the asset class and not “get fixated on recent events”.
Marsh added that value rather than growth had been, and looked set to continue to be the main driver of returns across the asset class.
The London Business School was presenting its Global Investment Returns Yearbook 2014, which is produced in conjunction with Credit Suisse.
For an in depth look into the London Business School data, check back with aiCIO later this week.
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