Emerging Markets Equity Performance Review

Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets. Massachusetts-based EPFR Global which tracks fund movement worldwide, said that another $3.5 billion went into emerging market equity funds for the week ending May 13. Since the March lows, EPFR says $18.6 billion have moved to emerging markets.

The following are some key points on Emerging Markets from an IMF working paper titled “Spillovers to Emerging Equity Markets: An Econometric Assessment” by L. Effie Psalida and Tao Sun:

1.Emerging market equities have outperformed since 2003  and have recovered nicely in the past 3 months. In the chart below, we can see that US, Germany, UK and Japan equity indices lagged in performance when compared to emerging markets. Latin America is ahead of Asia and other emerging countries.Emerging Markets

2. The stock market capitalization to GDP ratio of many emerging markets is now nearing those of advanced economies.

Emerging Market Caps

The above shows the countries like Jordan, Chile have rebounded most from the trough to their peak attained in October 2007.  Russia is lagging behind Brazil, China and India since Russia is more heavily dependent on commodities such as crude oil.

3.Equity market returns of emerging countries have risen at a much higher rate than their developed market peers while the P/E ratios are comparable.

Emerging Market PEs

Source: Spillovers to Emerging Equity Markets: An Econometric Assessment, IMF Working Paper, L. Effie Psalida and Tao Sun

The Brazilian market has returned an astonishing 1199% return between January 2003 and July 2008. In the same time period, the US market has grown the lowest in the above chart. US markets performed worse than those of Germany and the UK.

The P/E ratio of China is the highest as of May 1, 2009 at  about 27.0Russia has the lowest at about 5.0.The P/E ratios if US, India, Chile, Brazil, etc. are very close to each other.

It remains to be seen if emerging markets will continue the momentum and outperform the developed equities this year. Many of the markets such as India, China have already bounced back to reach very high levels though the underlying economy is not growing at the same rate before the credit crunch began.

Related ETFs include:

iShares MSCI Emerging Markets Index (EEM)
iShares FTSE/Xinhua China 25 Index (FXI)
iShares MSCI Brazil Index (EWZ)

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