“It’s deja vu all over again.” – Yogi Berra
Emerging markets are in turmoil once again as the price of oil and a rising dollar are causing major issues for a number of developing countries. Emerging markets go through periods of booms and busts on a regular basis, but it seems that investors forget about this every single time they crop up.
MSCI data on emerging market stocks goes back to 1988. Since then the annual returns on EM stocks is 11.5% while the S&P 500 has returned 10.4% per year. But those EM returns have come at a cost of 60% more volatility in the monthly returns. You get higher highs and lower lows.
Just look at the rolling five year return figures for each market:
The peaks and valleys in emerging markets are huge. The late-1990s and early 2000s saw negative double digit annual returns for quite some time.
From a diversification standpoint, this is actually a good thing. You don’t always want to see markets in lock-step with one another. But you can also see that emerging markets have much more variability from huge gains to crushing losses, even over a five year time frame. The current five year returns are less than 2% per year while the S&P 500 is up 15% a year.
Most people don’t realize that the U.S. itself was once an emerging market. From 1836 to 1928, the U.S. experienced a recession once every 2.1 years. Without the Great Depression, it’s unlikely the U.S. would have had such strong financial market returns in the ensuing 85 years. Unfortunately you have to break some eggs to make an omelette.
There will be winners and losers in the emerging market countries over time, but getting from here to there will see a number of boom-bust cycles. Get used to it.