Is Investing in Emerging Markets Worth It?

investing in Emerging Markets is often thought to bring above average returns but is this always the case hi I'm Maxim zube portfolio manager at Larry in this video I explain whether emerging markets in countries like India Mexico Saudi Arabia China and Brazil are worth investing in and the main risks to consider [Music] the term Emerging Markets was coined in 1981 by a world Bank employee who was promoting an investment fund for developing countries historically the term Emerging Market has been applied to low-income countries that are experiencing strong economic growth while many factors affect stock market returns a growing economy helps create a positive environment in which companies can Thrive and increase profits so rapid economic growth should imply High stock market returns but is this really the case let's look at two classic examples China and India two countries that have been the fastest growing economies among the G20 for the last 10 years during that decade the stock market returns of India and China have been well below those of the United States whose economic growth has been much more modest at just over two percent compared to over five percent in India and 6.7 percent in China as measured by the msci index in US Dollars the returns recorded over the same 10-year period were over 10 percent in India 7.4 percent in China 6.8 percent in Canada and a whopping 16.6 percent in the United States this may seem like an overly simple analysis but when we look at academic research we come to the same conclusions professors Dimson Marsh and Stanton of the London Business School made the controversial discovery that not only is there no correlation between economic growth and stock market performance but on the contrary the relationship may very well be negative in their report somewhat surprisingly economic growth was not associated with companies dividend growth after inflation rather the relationship was negative and significant since then along the same lines they have also found a negative correlation between GDP per capita growth and stock returns we can conclude that buying stocks from countries with strong economic growth does not automatically contribute to higher returns in the long run however there are some benefits to investing in other countries such as portfolio diversification since Global stock markets do not necessarily move in sync things can go wrong in one country and right in another at the same time but diversification has its limits and the correlation between economies tend to be stronger in times of crisis when things go really bad they tend to go bad for everyone and even more so for emerging markets which tend to be hit much harder during a crisis although each country has its own specific risk there are two main risks to consider regardless of the country you choose the first risk is the exchange rate currency fluctuations in Emerging Markets generally tend to be greater and they can have a significant impact on returns for example the msci India index over the past 10 years has returned 11.42 per year in local currency but 6.71 in US dollars as the rupee is depreciated by more than 50 percent against the US dollar over that period Then There is the risk of hyperinflation as it has been the case in Argentina for more than 20 years in addition to having gone bankrupt a few times in history Argentina has experienced periods of extremely high inflation especially in the last decade annual inflation rates in the country have exceeded 20 almost every year in the last 10 years even though their main stock index generated over 50 percent per year in Argentinian Pesos after the impact of depreciation the return was more like seven percent per year in US dollars or 10.3 percent in Canadian dollars which is good but at the cost of extreme volatility the second risk is geopolitical instability an unstable government or a geopolitical event such as war or important risk when investing in emerging countries the Russian stock market has completely collapsed since the events in Ukraine in 2022 and yet Russia used to be included in the acronym brick with Brazil India and China all identified as major emerging economic Powers it might be tempting to invest part of one's portfolio in some emerging countries in the hopes of hitting a home run sometimes it may well be worth it but you never know until after the fact just like the lottery we know someone will win the jackpot next week but we cannot know who it will be if you can't resist investing in Emerging Markets there are many exchange traded funds that can meet that need putting aside a small portion of your portfolio could be a nice compromise but I wouldn't bet your house on it as the risks are greater than the potential rewards for more investment ideas visit our website at claret.ca or contact me directly by clicking on the link in the description and don't forget to click on the Subscribe button below [Music]

Channel: Claret Asset Management

Views: 6,760

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Id: 9L7HMjzyOWQ

Length: 5min 34sec (334 seconds)

Published: Fri May 26 2023