Emerging Markets: A 20 Year Perspective

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Robert T
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Emerging Markets: A 20 Year Perspective

Post by Robert T »

.
Some interesting perspectives from the MSCI on emerging market experience. Here are some direct quotes that I found interesting, related to each of the topics below (seems consistent with other analysis).
  • Negative Skewness: “The MSCI Emerging Markets Index shows greater (nearly twice) negative skew than the MSCI World Index in this period, reflecting greater downside risk. This is evident with extreme negative returns during the emerging markets crisis in 1998.” (see pg. 36). The attribute is also highlighted by Harvey Campbell’s work. As suggested in the earlier ‘sub-merging’ markets discussion on the M* site a while ago, the implication to me is keep fixed income in Treasuries to reduce the negative skewness impact on an overall portfolio (if have larger than market allocation to EM). Corporate bonds have the same negative skewness characteristics. Just a consideration.

    Changing Correlations: “The MSCI Emerging Markets Index correlation with the MSCI World Index has increased from 0.48 to 0.8 in the 20 year period from 1988–2007, with the progressive integration of financial markets across the world.” IMO correlations over short periods can still be very low as in 2007.

    Valuation: “While pure valuation measures for emerging markets have caught up with developed markets, valuations based on PE/G ratios still show significant differences. Hence emerging markets stocks still appear to be cheaper based on expected growth rates, reflecting a persistent risk premium.” And as I suggested in an earlier recent post, EM are more like value stocks than growth stocks (just my take).
Emerging Markets: A 20 Year Perspective
Timeline Chart

Robert
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actuaryinvestor
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MSCI Emerging Markets Index

Post by actuaryinvestor »

Thanks for the links. I enjoyed looking through the report.

I'm surprised that Russia was added to MSCI's EM index as far back as 1997. Vanguard's EM Fund (VEIEX / VWO) left Russia out until a couple years ago. I hope Vanguard's decision was based on improved liquidity and ability to trade rather than performance chasing.

I also think the market cap to GDP graph on page 49 is interesting. I wonder what effect that will have on returns as that ratio increases for many emerging countries.

Do treasuries have positive skewness?

--
Brian
Valuethinker
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Re: Emerging Markets: A 20 Year Perspective

Post by Valuethinker »

Robert T wrote:.
Some interesting perspectives from the MSCI on emerging market experience. Here are some direct quotes that I found interesting, related to each of the topics below (seems consistent with other analysis).
  • Negative Skewness: “The MSCI Emerging Markets Index shows greater (nearly twice) negative skew than the MSCI World Index in this period, reflecting greater downside risk. This is evident with extreme negative returns during the emerging markets crisis in 1998.” (see pg. 36). The attribute is also highlighted by Harvey Campbell’s work. As suggested in the earlier ‘sub-merging’ markets discussion on the M* site a while ago, the implication to me is keep fixed income in Treasuries to reduce the negative skewness impact on an overall portfolio (if have larger than market allocation to EM). Corporate bonds have the same negative skewness characteristics. Just a consideration.

    Changing Correlations: “The MSCI Emerging Markets Index correlation with the MSCI World Index has increased from 0.48 to 0.8 in the 20 year period from 1988–2007, with the progressive integration of financial markets across the world.” IMO correlations over short periods can still be very low as in 2007.

    Valuation: “While pure valuation measures for emerging markets have caught up with developed markets, valuations based on PE/G ratios still show significant differences. Hence emerging markets stocks still appear to be cheaper based on expected growth rates, reflecting a persistent risk premium.” And as I suggested in an earlier recent post, EM are more like value stocks than growth stocks (just my take).
Emerging Markets: A 20 Year Perspective
Timeline Chart

Robert
.
I just wanted to thank you for posting that.
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gatorman
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Re: Emerging Markets: A 20 Year Perspective

Post by gatorman »

Valuethinker wrote:
Robert T wrote:.
Some interesting perspectives from the MSCI on emerging market experience. Here are some direct quotes that I found interesting, related to each of the topics below (seems consistent with other analysis).
  • Negative Skewness: “The MSCI Emerging Markets Index shows greater (nearly twice) negative skew than the MSCI World Index in this period, reflecting greater downside risk. This is evident with extreme negative returns during the emerging markets crisis in 1998.” (see pg. 36). The attribute is also highlighted by Harvey Campbell’s work. As suggested in the earlier ‘sub-merging’ markets discussion on the M* site a while ago, the implication to me is keep fixed income in Treasuries to reduce the negative skewness impact on an overall portfolio (if have larger than market allocation to EM). Corporate bonds have the same negative skewness characteristics. Just a consideration.

    Changing Correlations: “The MSCI Emerging Markets Index correlation with the MSCI World Index has increased from 0.48 to 0.8 in the 20 year period from 1988–2007, with the progressive integration of financial markets across the world.” IMO correlations over short periods can still be very low as in 2007.

    Valuation: “While pure valuation measures for emerging markets have caught up with developed markets, valuations based on PE/G ratios still show significant differences. Hence emerging markets stocks still appear to be cheaper based on expected growth rates, reflecting a persistent risk premium.” And as I suggested in an earlier recent post, EM are more like value stocks than growth stocks (just my take).
Emerging Markets: A 20 Year Perspective
Timeline Chart

Robert
.
I just wanted to thank you for posting that.
Ditto, very interesting.
gatorman
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