Developed…Emerging…what’s the difference?
”The Opportunities that everyone cannot see are The Real Opportunities” (Jack Ma)So Quarter one of 2019 has now been and gone. Best performing first quarter in the US in a decade and with the exception of a small drop in the Nikkei, major markets posted their third positive month in a row…so all good…data being
MSCI World +0.7% +11.8%
S&P 500 +1.8% +13.0%
FTSE +2.0% +7.3%
Nikkei -0.8% +6.0%
SSE +5.1% +24.0%
MSCI EM +1.4% +12.7%
Fairly flat month for currencies with the Greenback edging its way ahead of most currencies as follows:
GBP +1.7% -2.3%
EUR +1.2% +2.2%
JPY -0.7% +1.2%
AUD +0.0% -0.7%
CNY +0.2% -2.4%
So the noticeable standout is China. A very simple passive play on the Shanghai exchange with $100k would have netted you a cool $24k profit so far this year, time to bank that I would say. The Emerging Markets return is one of the best with a 12.7% return, so it begs the question are Emerging Markets or Developed markets the best home for your money?
There’s no doubt that potential for Growth exists in the Emerging Market space. I often talk about the consumer driving growth in companies which leads to growth in your investments and assets. According to MSCI – there are 23 countries which have “Developed Markets”. The population of these countries combined is just under 1 billion which means that the other 6.6 billion live in countries with undeveloped markets.
However we must also consider that many of the companies which own global brands where that consumer growth sits are trading in Developed Markets. Companies like Unilever, Nestle, Coca Cola currently derive around 60% of their revenue from Emerging markets, this figure expected to increase to nearer 80% within the next 10 years. So we could state a case that these companies are Emerging Market stocks….in fact some Fund managers may use this to stabilise their offerings.
Risks in Emerging Markets are greater, generally more exposed to Geo Political events and volatile currencies. As with all investing it depends where you are in your cycle. Similar to clients looking for more fixed income as they approach retirement, your level of equity risk also needs to be managed according to your time horizons. Although everybody should have some exposure to the Emerging Markets, how much is an individual situation. But if you are young, capital growth focused and able to give your investments time you can afford to be overweight in this area. Over the last 5 years EM is where you will find the best returns
In that period, developed markets have made:
US – 52%
Japan – 40%
UK – 9%
Giving you an average of 34%
Looking at the world’s two largest undeveloped markets of India and China (which also are home to one third of the world’s population) we saw returns of:
India – 71%
China – 50%
Giving you an average of 61%. The China number also includes a market crash in June 2015 when in the year preceding, the Chinese market was up 250%….so any manager / advisor worth anything would have locked some of these gains in and given you a much better ROI than 50%
Yes, volatility is far more inherent in these markets but to reuse the quote by the great Charlie Munger in January’s report using volatility as a measure of risk is “madness”. You just need to make sure you have the right guidance when entering these choppy waters and you will sail out the other side happily.
So where was the best market for the last five years….no other than Jamaica. In five years the market is up 300%. Home to legendary athlete and all round cool customer Usain Bolt, one of the quirks of the Jamaican market is that is only opens for three & a half hours trading a day…but seems to work for them
So in closing yes Emerging Markets can be seen as risky but investing correctly in these areas will pay its rewards…….so in the words of another Jamaican legend, “Don’t worry , about a thing, cause every little thing, gonna be alright…….