Is the division of international markets into "developed" and "emerging" meaningful?

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tc101
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Is the division of international markets into "developed" and "emerging" meaningful?

Post by tc101 » Thu Dec 06, 2018 1:55 pm

Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by asif408 » Thu Dec 06, 2018 2:34 pm

The US and developed international markets are highly correlated, yet the returns have differed pretty substantially over the last 6-7 years. You see a similar difference at times with emerging markets. Just look, for instance, at the performance from 2011-2016: https://www.portfoliovisualizer.com/ass ... ingDays=60

Correlations between developed and EM were 0.85, yet returns differed by 9% per year over that time frame. Same thing with the US and EAFE, 0.9 correlation, yet 9% difference in return per year. If you believe the magnitude of change matters as much or more than correlation, then yes, the division of international markets into developed and emerging has been meaningful in the past and will probably be meaningful in the future. If you believe correlation is primarily what matters, then no, it doesn't matter.

The other thing about correlation is that you have to believe it is static or will only increase to believe the division is not meaningful. There may be good reasons to believe correlations are permanently higher, but it is also a leap of faith to think that they couldn't fall in the future (and it appears they may already be falling based on the last few years of data, though few on these boards ever point that out or acknowledge it).

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by vineviz » Thu Dec 06, 2018 3:06 pm

tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
"Emerging" does not describe the return potential of stocks, but rather the economic and regulatory protections available to investors in the stock markets of those countries.

Emerging markets are "emerging" in the sense that their equity markets are becoming more liquid and shareholder friendly. As you note, a country can have a very large economy but still be classified as having an "emerging" equity market.
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by megabad » Thu Dec 06, 2018 3:18 pm

vineviz wrote:
Thu Dec 06, 2018 3:06 pm
tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
"Emerging" does not describe the return potential of stocks, but rather the economic and regulatory protections available to investors in the stock markets of those countries.

Emerging markets are "emerging" in the sense that their equity markets are becoming more liquid and shareholder friendly. As you note, a country can have a very large economy but still be classified as having an "emerging" equity market.
This is a great answer.

Do you view China the same as say the UK, Canada, or Germany? I don't for mainly economic and regulatory reasons as above, but just because I think there is a "division" between emerging and developed markets doesn't necessarily mean that they must be held via separate funds.

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by vineviz » Thu Dec 06, 2018 3:37 pm

megabad wrote:
Thu Dec 06, 2018 3:18 pm
Do you view China the same as say the UK, Canada, or Germany? I don't for mainly economic and regulatory reasons as above, but just because I think there is a "division" between emerging and developed markets doesn't necessarily mean that they must be held via separate funds.
There are many funds that allow the investor to hold stocks from both emerging and developed markets in a single fund or ETF.

Because stocks from emerging markets to tend to be less correlated with US stocks than stocks from developed markets, I prefer to use discrete emerging market funds to maximize the diversification of my portfolio by overweighting them. I find this more efficient (even if a little less simple) than restricting emerging markets to their market cap weighting.
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by WanderingDoc » Thu Dec 06, 2018 3:47 pm

megabad wrote:
Thu Dec 06, 2018 3:18 pm
vineviz wrote:
Thu Dec 06, 2018 3:06 pm
tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
"Emerging" does not describe the return potential of stocks, but rather the economic and regulatory protections available to investors in the stock markets of those countries.

Emerging markets are "emerging" in the sense that their equity markets are becoming more liquid and shareholder friendly. As you note, a country can have a very large economy but still be classified as having an "emerging" equity market.
This is a great answer.

Do you view China the same as say the UK, Canada, or Germany? I don't for mainly economic and regulatory reasons as above, but just because I think there is a "division" between emerging and developed markets doesn't necessarily mean that they must be held via separate funds.
I also don't view them the same. I view China better :) Admire their work ethic. Also, everyone I've met lately from there was unusually talented. ie., spoke 3 languages, could sing, IQ of 160, and sweet-natured. This can't be a coincidence. They are on to something.
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by alex_686 » Thu Dec 06, 2018 3:48 pm

vineviz wrote:
Thu Dec 06, 2018 3:06 pm
"Emerging" does not describe the return potential of stocks, but rather the economic and regulatory protections available to investors in the stock markets of those countries.

Emerging markets are "emerging" in the sense that their equity markets are becoming more liquid and shareholder friendly. As you note, a country can have a very large economy but still be classified as having an "emerging" equity market.
I will modestly take the other side. I think it was once important, but the distinction is fading fast.

They key point is that indexes are market cap weighted and hence dominated by multinational mega cap corporations. On the risk and returns side they look closer to the US and DM kin. Many of these companies are keen to attract international investors, so adopt US and DM corporate standards. I will point out that any company that sponsors an ADR in the US falls under SEC regulations in terms of audits, reporting, etc.

Get away from the multinational mega cap stocks that dominate the index into the small cap stocks - that would be a whole different ball of wax.

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by nisiprius » Thu Dec 06, 2018 4:11 pm

The "market" in "emerging markets" refers to the whole economy or country as a world market for commerce, not to the stock market.

"Emerging markets" is a kind of euphemism for what properly should be called "less-developed countries" or even "third-world countries." It is similar to the phrase "'value' stocks" (companies most investors think are lousy) or "'high-yield' bonds" (low quality, not investment-grade).

The division between "emerging markets" and "developed markets" is a judgement call, and Wikipedia offersnine different lists from nine different authorities.
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by kolea » Fri Dec 07, 2018 2:43 pm

tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
This is like asking the distinction between good art and bad art - it all depends on what you are looking for. You mentioned correlation, which is one metric to use, but there are many others, for instance safety. Not safety in the sense of volatility, but more in the sense of "is this company likely to be nationalized by the government". You choose the metrics that are important for you and your goals and then find the countries that deliver on those. Emerging/developed is just a roll-up of a lot of metrics, and it is binary one at that, whereas there often should be a spectrum of worst to best of whatever metric you end up using.
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by jalbert » Sat Dec 08, 2018 2:41 am

tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
Correlations have nothing to do with the distinction.
Risk is not a guarantor of return.

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by jalbert » Sat Dec 08, 2018 3:38 am

Emerging markets equity funds are diversified across many currencies and economies. This increase correlation in aggregate with, say, US equities by blurring the volatility of a single country. Here are some sample correlations for US equities with those of Taiwan and those trading in China:

https://www.portfoliovisualizer.com/ass ... ingDays=60
Risk is not a guarantor of return.

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by AlohaJoe » Sat Dec 08, 2018 3:42 am

asif408 wrote:
Thu Dec 06, 2018 2:34 pm
The US and developed international markets are highly correlated
This is true-ish but also a bit misleading. By looking at developed (or emerging) in aggregate it becomes a bit weird to talk about whether they are correlated with the US and whether that's a useful difference between developed and emerging.

For instance, Australia (developed) is less correlated with the US than Brazil (emerging). Japan (developed) is less correlated with the US than India (emerging). Sweden (developed) is less correlated with the US than Mexico (emerging). Singapore (developed) is less correlated with the US than Russia (emerging).

To a large extent we can rephrase it as: developed is correlated with the US thanks to the weight of UK+Canada in market cap weightings and emerging is not correlated with the US thanks to China+Taiwan in market cap weightings. I'm sort of tongue in cheek with that but only sort of. It isn't clear how much the different correlations are really due to "emerging/developed" and how much they are due to geographic explanations.

To restate tc101's question in a different form, is the developing/emerging distinction a useful one for investors? Or should we instead carve up the asset classes into something like "highly correlated with the US", which would include UK, Canada, Mexico, Brazil, etc in a single fund; and "not highly correlated with the US" which would include China, Japan, Australia, South Korea in a single fund.

You sorta see that with the old school EAFE & Pacific funds but I think that has largely fallen out of favor. (I remember a very old Bernstein essay suggesting holding those two funds separately rather than a single international fund.) Maybe another question is why has the developed/emerging split apparently "won" the mindshare battle versus an EAFE/Pacific split? Is it because a Pacific split has traditionally been horrid performance due to Japan's three decades of underperformance, while that same Japanese underperformance is masked when they are grouped in with other developing markets?

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by pdavi21 » Sat Dec 08, 2018 4:48 am

Yes. The developed nations generally have slower economic growth, more deflation, and higher labor costs.
I always thought Emerging referred to GDP growth rate, but it sounds like others are suggesting it means something else.
South Korea was always the odd man out, but it seems Vanguard has upgraded them to "developed".

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by asif408 » Sun Dec 09, 2018 9:18 am

AlohaJoe wrote:
Sat Dec 08, 2018 3:42 am
asif408 wrote:
Thu Dec 06, 2018 2:34 pm
The US and developed international markets are highly correlated
This is true-ish but also a bit misleading. By looking at developed (or emerging) in aggregate it becomes a bit weird to talk about whether they are correlated with the US and whether that's a useful difference between developed and emerging.

For instance, Australia (developed) is less correlated with the US than Brazil (emerging). Japan (developed) is less correlated with the US than India (emerging). Sweden (developed) is less correlated with the US than Mexico (emerging). Singapore (developed) is less correlated with the US than Russia (emerging).

To a large extent we can rephrase it as: developed is correlated with the US thanks to the weight of UK+Canada in market cap weightings and emerging is not correlated with the US thanks to China+Taiwan in market cap weightings. I'm sort of tongue in cheek with that but only sort of. It isn't clear how much the different correlations are really due to "emerging/developed" and how much they are due to geographic explanations.

To restate tc101's question in a different form, is the developing/emerging distinction a useful one for investors? Or should we instead carve up the asset classes into something like "highly correlated with the US", which would include UK, Canada, Mexico, Brazil, etc in a single fund; and "not highly correlated with the US" which would include China, Japan, Australia, South Korea in a single fund.

You sorta see that with the old school EAFE & Pacific funds but I think that has largely fallen out of favor. (I remember a very old Bernstein essay suggesting holding those two funds separately rather than a single international fund.) Maybe another question is why has the developed/emerging split apparently "won" the mindshare battle versus an EAFE/Pacific split? Is it because a Pacific split has traditionally been horrid performance due to Japan's three decades of underperformance, while that same Japanese underperformance is masked when they are grouped in with other developing markets?
Don't necessarily disagree with you here. My point was, and you seem to be on the same page, is that most of us use a Total International fund, or some variation of it. A few separate foreign developed and emerging, but almost no one I have seen here has ever posted a portfolio with significant individual country holdings (except, of course, for the US).

I think your comment about a total international fund winning out is spot on. Vanguard's Pacific and European funds, for instance, started in 1990, right at the peak of the Japan bubble. The European fund didn't do too badly compared to the US until after 2009, while the Pacific fund has done terrible compared to either the US or European fund since 1990. Interestingly, though, if you look from late 1998 on, the Pacific fund has outperformed the European fund, and hasn't done much worse than the US fund in that time frame. I have to imagine there wasn't much of a demand in the late 1990s for a Pacific or Japanese fund because of its recent past performance. You tend to see the most new funds started in a region, sector, etc. after a time of outperformance. I remember a few years ago looking at the options for emerging markets value funds, and the choices were few and far between. OTOH, when I searched for FANG or technology funds, I had an overwhelming number of options. Not surprisingly, these have been the worst and best performers, respectively, of the major asset classes in recent years.
Last edited by asif408 on Sun Dec 09, 2018 9:29 am, edited 2 times in total.

Valuethinker
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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by Valuethinker » Sun Dec 09, 2018 9:21 am

pdavi21 wrote:
Sat Dec 08, 2018 4:48 am
Yes. The developed nations generally have slower economic growth, more deflation, and higher labor costs.
I always thought Emerging referred to GDP growth rate, but it sounds like others are suggesting it means something else.
South Korea was always the odd man out, but it seems Vanguard has upgraded them to "developed".
Israel was another odd man out, but is now a "Developed" market.

It's a fairly arbitrary definition - really down to the index provider. From memory one classifies South Korea as Developed, and the other major one Emerging? (between FTSE & MSCI).

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by blinx77 » Sun Dec 09, 2018 11:25 am

WanderingDoc wrote:
Thu Dec 06, 2018 3:47 pm
megabad wrote:
Thu Dec 06, 2018 3:18 pm
vineviz wrote:
Thu Dec 06, 2018 3:06 pm
tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
"Emerging" does not describe the return potential of stocks, but rather the economic and regulatory protections available to investors in the stock markets of those countries.

Emerging markets are "emerging" in the sense that their equity markets are becoming more liquid and shareholder friendly. As you note, a country can have a very large economy but still be classified as having an "emerging" equity market.
This is a great answer.

Do you view China the same as say the UK, Canada, or Germany? I don't for mainly economic and regulatory reasons as above, but just because I think there is a "division" between emerging and developed markets doesn't necessarily mean that they must be held via separate funds.
I also don't view them the same. I view China better :) Admire their work ethic. Also, everyone I've met lately from there was unusually talented. ie., spoke 3 languages, could sing, IQ of 160, and sweet-natured. This can't be a coincidence. They are on to something.
I get what you are saying but you do realize that your sampling is non-random, right?

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Re: Is the division of international markets into "developed" and "emerging" meaningful?

Post by WanderingDoc » Sun Dec 09, 2018 12:12 pm

blinx77 wrote:
Sun Dec 09, 2018 11:25 am
WanderingDoc wrote:
Thu Dec 06, 2018 3:47 pm
megabad wrote:
Thu Dec 06, 2018 3:18 pm
vineviz wrote:
Thu Dec 06, 2018 3:06 pm
tc101 wrote:
Thu Dec 06, 2018 1:55 pm
Is the division of international markets into "developed" and "emerging" meaningful? I charted them and they seem to be highly correlated. The two biggest countries in the emerging market index are China and Taiwan. Is it meaningful to say they are emerging?
"Emerging" does not describe the return potential of stocks, but rather the economic and regulatory protections available to investors in the stock markets of those countries.

Emerging markets are "emerging" in the sense that their equity markets are becoming more liquid and shareholder friendly. As you note, a country can have a very large economy but still be classified as having an "emerging" equity market.
This is a great answer.

Do you view China the same as say the UK, Canada, or Germany? I don't for mainly economic and regulatory reasons as above, but just because I think there is a "division" between emerging and developed markets doesn't necessarily mean that they must be held via separate funds.
I also don't view them the same. I view China better :) Admire their work ethic. Also, everyone I've met lately from there was unusually talented. ie., spoke 3 languages, could sing, IQ of 160, and sweet-natured. This can't be a coincidence. They are on to something.
I get what you are saying but you do realize that your sampling is non-random, right?
Of course. I still think something is going on with that country/people that might may the U.S. fade away like a 3rd world country. I say this with genuine concern as most of my wealth is obviously tied to the U.S. dollar.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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