Author Topic: Emerging Markets.. both return-enhancing and risk-reducing  (Read 2985 times)

vand

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Emerging Markets.. both return-enhancing and risk-reducing
« on: August 27, 2019, 02:57:36 AM »
Everyone knows Emerging Markets are a basket case, right? A quick way to lose money.

Except that is the general investing consensus that exists within the current investing paradigm. It has not always been so, and it may not be so when we eventually transition from the current paradigm into whatever the next one is.

I was reading the rather excellent bpsandpeices blog, which makes a case for including EMs within your portfolio. Had you allocation a 10-20% portion it would have outperformed a TSM portfolio over most holding periods within the last 40 years. The key is that EMs are negatively correlated to the USD. They are one of these counter-balancing asset classes that tend to zig when others go zag.

Anyway, judge for yourselves:
https://bpsandpieces.com/2018/09/24/the-curious-case-for-emerging-markets/ (part2)
https://bpsandpieces.com/2018/09/14/not-your-fathers-emerging-markets/ (part1)




Since the inception of the MSCI Emerging Markets Index in 1988 through August of this year, EM returned 10.84% annualized while the S&P 500 returned 10.80%. Despite the eerily similar gains, a blend of the two, rebalanced annually, would have yielded better results. Over the same timeframe:

90% S&P 500/10% MSCI Emerging Markets: 11.10% annualized
85% S&P 500/15% MSCI Emerging Markets: 11.23% annualized
80% S&P 500/20% MSCI Emerging Markets: 11.34% annualized

These incremental return enhancements would have been accompanied by volatility not materially higher than owning solely the S&P 500, thanks to the risk management benefits offered by diversification and rebalancing.


More return  for the same portfolio risk (or less risk for the same return) is better investing.
« Last Edit: August 27, 2019, 03:27:12 AM by vand »

ctuser1

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #1 on: August 27, 2019, 08:51:19 AM »
I know it is a sacrilegious to say this in MMM forums where people follow the bogleheads philosophy of investing.

But here it goes...
MSCI Emerging markets index is way too broad for me :-(

It is way to heavily weighted in favor of China. I don't like China for a several reasons, but the standout reason is their demographic headwind. They will get old before they get rich!!

I am not super hopeful on the overall EM doing that great in the next 30 years or so when it is weighed down so heavily by China!!

Now if there was something (or a combination of things) that focuses on SE Asia + India then we would be good to go. :-)...

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #2 on: August 27, 2019, 09:07:19 AM »
I know it is a sacrilegious to say this in MMM forums where people follow the bogleheads philosophy of investing.

But here it goes...
MSCI Emerging markets index is way too broad for me :-(

It is way to heavily weighted in favor of China. I don't like China for a several reasons, but the standout reason is their demographic headwind. They will get old before they get rich!!

I am not super hopeful on the overall EM doing that great in the next 30 years or so when it is weighed down so heavily by China!!

Now if there was something (or a combination of things) that focuses on SE Asia + India then we would be good to go. :-)...


I was anti-Japan for the same reason - their demographics are truly horrendous. I hold a Asia ex-Japan fund for this reason.

We'll see what happens, but if the demographics do prove to be a drag on China then the indexes will automatically shift to downsize China weighting and bump up other growing economies'. Overall I'm still positive as I think demographics are more in favour for EMs that they are for developed markets. It is also worth pointing out that as any economy grows and a middle class develops it will natrually attract immigrants from other countries.


ctuser1

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #3 on: August 27, 2019, 09:21:07 AM »
I know it is a sacrilegious to say this in MMM forums where people follow the bogleheads philosophy of investing.

But here it goes...
MSCI Emerging markets index is way too broad for me :-(

It is way to heavily weighted in favor of China. I don't like China for a several reasons, but the standout reason is their demographic headwind. They will get old before they get rich!!

I am not super hopeful on the overall EM doing that great in the next 30 years or so when it is weighed down so heavily by China!!

Now if there was something (or a combination of things) that focuses on SE Asia + India then we would be good to go. :-)...


I was anti-Japan for the same reason - their demographics are truly horrendous. I hold a Asia ex-Japan fund for this reason.

We'll see what happens, but if the demographics do prove to be a drag on China then the indexes will automatically shift to downsize China weighting and bump up other growing economies'. Overall I'm still positive as I think demographics are more in favour for EMs that they are for developed markets. It is also worth pointing out that as any economy grows and a middle class develops it will natrually attract immigrants from other countries.

>> It is also worth pointing out that as any economy grows and a middle class develops it will natrually attract immigrants from other countries.

I would contest this sentiment very strongly!!

This is equally dependent on the "culture" of the country in question. Yes, UK/US/Canada/Aus attracts a large number of immigrants.

Not so with Japan. Largely not true even for other Western European countries - except if you mean immigrants from other EU countries.

I don't think Chinese culture is quite as insular as the Japanese, but neither is it as open as Canada (or even US) for example.

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #4 on: August 27, 2019, 09:38:08 AM »
I know it is a sacrilegious to say this in MMM forums where people follow the bogleheads philosophy of investing.

But here it goes...
MSCI Emerging markets index is way too broad for me :-(

It is way to heavily weighted in favor of China. I don't like China for a several reasons, but the standout reason is their demographic headwind. They will get old before they get rich!!

I am not super hopeful on the overall EM doing that great in the next 30 years or so when it is weighed down so heavily by China!!

Now if there was something (or a combination of things) that focuses on SE Asia + India then we would be good to go. :-)...


I was anti-Japan for the same reason - their demographics are truly horrendous. I hold a Asia ex-Japan fund for this reason.

We'll see what happens, but if the demographics do prove to be a drag on China then the indexes will automatically shift to downsize China weighting and bump up other growing economies'. Overall I'm still positive as I think demographics are more in favour for EMs that they are for developed markets. It is also worth pointing out that as any economy grows and a middle class develops it will natrually attract immigrants from other countries.

>> It is also worth pointing out that as any economy grows and a middle class develops it will natrually attract immigrants from other countries.

I would contest this sentiment very strongly!!

This is equally dependent on the "culture" of the country in question. Yes, UK/US/Canada/Aus attracts a large number of immigrants.

Not so with Japan. Largely not true even for other Western European countries - except if you mean immigrants from other EU countries.

I don't think Chinese culture is quite as insular as the Japanese, but neither is it as open as Canada (or even US) for example.

Well there's only so many people to go around in the world as a while ;)

I think the trends are for India to overtake China as the most populous nation within the next decade or so, and perhaps this will be the growth engine that drives the EMs in the next decade.. I think there are plenty of reason to still be optimistic for the EMs.

Western economies will face their own tremendous headwinds with a baby boomer population that is reaching retirement age.

MaaS

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #5 on: August 27, 2019, 10:07:11 AM »
I think 10-20% makes sense. Honestly, 10% is a little light IMO. Not holding any EM investments is too much of a bet on the west. The next century could be completely different than the previous. I believe in the U.S. strongly - but I'm not willing to put all my eggs in that basket. I'm much less confident in Europe or Japan.

There will probably be massive swings in EMs over the next few decades. Rebalancing is key.

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #6 on: August 07, 2020, 08:47:18 AM »
A good article here explaining the reasons why EMs are countercyclical to Developed markets, and especially the US.. it's all to do with funding using foreign debt:

https://www.knowledgeleaderscapital.com/2019/05/02/emerging-market-stocks-underperform-when-the-us-dollar-strengthens-heres-why/

bthewalls

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #7 on: August 07, 2020, 08:57:45 AM »
Vand, what EM ETFs do you prefer?

Baz

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #8 on: August 07, 2020, 09:05:08 AM »
To me having a slice of your assets in EM ETF has always been a no=brainer.  It has been part of very common advice to own a little EM as part of a diversified portfolio.

I have never bought the only buy sp500 argument that seem so common in FI circles when you can be better diversified with so little cost these days.


vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #9 on: August 07, 2020, 09:30:46 AM »
Vand, what EM ETFs do you prefer?

Baz

UK:JMG but it's an active fund with a 1% management fee.. which I've been more than happy to pay considering they've handily beaten UK:VFEM in the time I've held them.

bthewalls

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #10 on: August 07, 2020, 10:51:59 AM »
Vand, what EM ETFs do you prefer?

Baz

UK:JMG but it's an active fund with a 1% management fee.. which I've been more than happy to pay considering they've handily beaten UK:VFEM in the time I've held them.

ok, will check it out....1% is high

Ichabod

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #11 on: August 07, 2020, 12:22:30 PM »
I know it is a sacrilegious to say this in MMM forums where people follow the bogleheads philosophy of investing.

But here it goes...
MSCI Emerging markets index is way too broad for me :-(

It is way to heavily weighted in favor of China. I don't like China for a several reasons, but the standout reason is their demographic headwind. They will get old before they get rich!!

I am not super hopeful on the overall EM doing that great in the next 30 years or so when it is weighed down so heavily by China!!

Now if there was something (or a combination of things) that focuses on SE Asia + India then we would be good to go. :-)...

EMXC is an ETF index that tracks EMs minus China. It does include South Korea, which most would classify as developed.

I'd be interested to see a demographics-based index, and I even contemplated rolling my own with various country-wide indices, but I doubt that I'd stay up top of it.

Buffaloski Boris

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #12 on: August 07, 2020, 12:51:11 PM »
I know it is a sacrilegious to say this in MMM forums where people follow the bogleheads philosophy of investing.

But here it goes...
MSCI Emerging markets index is way too broad for me :-(

It is way to heavily weighted in favor of China. I don't like China for a several reasons, but the standout reason is their demographic headwind. They will get old before they get rich!!

I am not super hopeful on the overall EM doing that great in the next 30 years or so when it is weighed down so heavily by China!!

Now if there was something (or a combination of things) that focuses on SE Asia + India then we would be good to go. :-)...

EMXC is an ETF index that tracks EMs minus China. It does include South Korea, which most would classify as developed.

I'd be interested to see a demographics-based index, and I even contemplated rolling my own with various country-wide indices, but I doubt that I'd stay up top of it.

Another really good post. I wasnít aware of EMXC.

Curious as to why and what youíre looking at when you talk about a demographics based index?

Ichabod

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #13 on: August 07, 2020, 01:46:57 PM »
Curious as to why and what youíre looking at when you talk about a demographics based index?
If I had to create one on the fly, I'd do it like this. Global median age is about 30. I'd invest in any EMs or DMs with a median age of 30 or younger. I'd avoid frontier markets. I'd still use market-weighting for all countries that are included.

I think a high worker-to-retiree ratio will lead to faster economic growth. I worry about the difficulties of maintaining economic dynamism and the welfare state in countries with shrinking populations. Japan is starting to face some of these difficulties.

Of course, there are multiple factors. And I could be mistaking causation for correlation. And automation and AI could sweep in and change the dynamics. Another reason I didn't go forward with the strategy. :)

Buffaloski Boris

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #14 on: August 07, 2020, 03:42:46 PM »
Curious as to why and what youíre looking at when you talk about a demographics based index?
If I had to create one on the fly, I'd do it like this. Global median age is about 30. I'd invest in any EMs or DMs with a median age of 30 or younger. I'd avoid frontier markets. I'd still use market-weighting for all countries that are included.

I think a high worker-to-retiree ratio will lead to faster economic growth. I worry about the difficulties of maintaining economic dynamism and the welfare state in countries with shrinking populations. Japan is starting to face some of these difficulties.

Of course, there are multiple factors. And I could be mistaking causation for correlation. And automation and AI could sweep in and change the dynamics. Another reason I didn't go forward with the strategy. :)

Hmm. Thatís a very interesting strategy. Not to knock it because I think itís a good idea, but stock markets donít necessarily reflect the underlying economics of a country.

LennStar

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #15 on: August 08, 2020, 11:18:12 AM »
I have 2 small positions in EM ETFs that have very different country weights.
One is up 20% and the other is down 20% since the start of the year.

EM is not EM ;)

park10

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #16 on: August 11, 2020, 09:33:14 PM »
Emerging markets have been dead money for a long time. For ex: Sept 2010, $EEM high was $44.9, and this month August 2020 high so far is ..$44.9. The $QQQ by comparison....never mind.... I still have portion of my money in $EEM, and other international junk such as Developed Europe Africa Far East (EAFE) etc... dont know why... They have been conducive to writing covered calls though i will say that....

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #17 on: August 18, 2020, 04:19:18 AM »
A good post here about the changed composition of EMs and the potential when the cycle eventually flips:
https://awealthofcommonsense.com/2020/08/are-emerging-markets-turning-into-the-sp-500/


clarkfan1979

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #18 on: August 18, 2020, 12:35:32 PM »
I currently have 20% international funds. My international funds have done very well during the last 6 months of the recovery. They performed better than my large cap.

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #19 on: August 18, 2020, 12:54:48 PM »
I currently have 20% international funds. My international funds have done very well during the last 6 months of the recovery. They performed better than my large cap.

Yep. Some of that is likely to also be currency effect if you are unhedged, given USD has weakened.

park10

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #20 on: August 18, 2020, 07:27:10 PM »
I currently have 20% international funds. My international funds have done very well during the last 6 months of the recovery. They performed better than my large cap.
From Coronavirus low in late march until close today: $SPY: +55.4 %, $QQQ+68.9%, $EEM: +49%... $SPY and $QQQ Both made new Lifetime Highs today, and this does not even include dividends (2 dividends were paid since late march).... $EEM has not been terrible, but has not outperformed either US stock indexes.

Juan Ponce de Leůn

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #21 on: August 19, 2020, 01:40:13 AM »
Don't fool yourself into thinking companies in emerging markets operate like western countries.  Corruption is rife.  How much of a companies potential earnings is pilfered away by corruption?  Also even if their economies are growing it doesn't mean new companies are going to list on their local exchange.  Chinese tech firms might choose to list on the NASDAQ or NYSE.  "As of February 25, 2019, there were 156 Chinese companies listed on these U.S. exchanges with a total market capitalization of $1.2 trillion."

Andy R

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #22 on: August 19, 2020, 02:52:51 AM »
Don't fool yourself into thinking companies in emerging markets operate like western countries.  Corruption is rife.  How much of a companies potential earnings is pilfered away by corruption?  Also even if their economies are growing it doesn't mean new companies are going to list on their local exchange.  Chinese tech firms might choose to list on the NASDAQ or NYSE.  "As of February 25, 2019, there were 156 Chinese companies listed on these U.S. exchanges with a total market capitalization of $1.2 trillion."

Don't fool yourself into thinking everyone is fooling themselves.
All of that is known and priced in.

Buffaloski Boris

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #23 on: August 23, 2020, 05:15:21 PM »
Don't fool yourself into thinking companies in emerging markets operate like western countries.  Corruption is rife.  How much of a companies potential earnings is pilfered away by corruption?  Also even if their economies are growing it doesn't mean new companies are going to list on their local exchange.  Chinese tech firms might choose to list on the NASDAQ or NYSE.  "As of February 25, 2019, there were 156 Chinese companies listed on these U.S. exchanges with a total market capitalization of $1.2 trillion."

Don't fool yourself into thinking everyone is fooling themselves.
All of that is known and priced in.

That link was hilarious and about the best summation of the Efficient Markets Hypothesis Iíve seen. Thanks for posting.

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #24 on: December 28, 2020, 08:05:15 AM »
I know that the stock market is not the economy, but long term this is why long term I am so much more bullish on EMs than Developed markets:
https://www.bloomberg.com/news/articles/2020-12-26/covid-fallout-means-china-to-overtake-u-s-economy-earlier

Currently the Chinese economy accounts for about 4% of the global equity market. My guess is that by the time time China becomes the largest economy, its equity markets are going to command a significantly larger chunk of the ovall pie.


bwall

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #25 on: December 28, 2020, 08:59:32 AM »
China (PRC) still doesn't allow overseas investors to invest in mainland shares.

The biggest Chinese stock names: Alibaba, Tencent and Baidu, are all listed outside mainland China. Thus, all equity gains are unavailable to investors in mainland Chinese stock markets. Their IPO's were possible due to Variable Interest Entity (VIE). Read more about it here: https://en.wikipedia.org/wiki/Variable_interest_entity

Besides that, the CHY is a non-convertible currency, meaning that if foreigners were somehow able to invest in mainland Chinese shares, they would have no means to repatriate any capital gains.

effigy98

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #26 on: December 28, 2020, 10:15:33 AM »
I use commodities as my global diversifier. If EM does really well, commodities will probably do well too. The only wild card is EM tech, which I have separate allocations to as they have much higher upside due to the data advantages due to higher number of users vs American tech companies which can speed up their research into AI.

bthewalls

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #27 on: December 28, 2020, 01:33:44 PM »
China (PRC) still doesn't allow overseas investors to invest in mainland shares

Ive recently started buying iShares MSCI China A ETF USD Acc (CNYA).  but costs are quite high c. 0.4%, so hard to direct monthly investment towards it. Im uk (northern ireland) based, so our products are much more expensives in general that USA based products.

Given that China is set up to be the next world superpower, CNYA was best index available to me in UK.  Vand you might have others?... havent researched in depth....

Barry

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #28 on: December 29, 2020, 02:39:32 AM »
China (PRC) still doesn't allow overseas investors to invest in mainland shares

Ive recently started buying iShares MSCI China A ETF USD Acc (CNYA).  but costs are quite high c. 0.4%, so hard to direct monthly investment towards it. Im uk (northern ireland) based, so our products are much more expensives in general that USA based products.

Given that China is set up to be the next world superpower, CNYA was best index available to me in UK.  Vand you might have others?... havent researched in depth....

Barry

I have a significant chunk of my portfolio in a couple of active funds that have big exposure to China, Veritas Asian fund & JPM Emerging markets. I think Chinese equities make up roughly 45% in both funds.. it was one of the things I looked at when I was initially selecting the funds a couple of years ago, and I have to say that I am not disappointed at all by their performance so far.

bthewalls

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #29 on: December 29, 2020, 08:05:45 AM »

I have a significant chunk of my portfolio in a couple of active funds that have big exposure to China, Veritas Asian fund & JPM Emerging markets. I think Chinese equities make up roughly 45% in both funds.. it was one of the things I looked at when I was initially selecting the funds a couple of years ago, and I have to say that I am not disappointed at all by their performance so far.
[/quote]

Vand, what fees you paying on JPM Emerging markets? I see a few options on my ISA platform?

vand

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Re: Emerging Markets.. both return-enhancing and risk-reducing
« Reply #30 on: December 29, 2020, 11:40:20 AM »

I have a significant chunk of my portfolio in a couple of active funds that have big exposure to China, Veritas Asian fund & JPM Emerging markets. I think Chinese equities make up roughly 45% in both funds.. it was one of the things I looked at when I was initially selecting the funds a couple of years ago, and I have to say that I am not disappointed at all by their performance so far.

Vand, what fees you paying on JPM Emerging markets? I see a few options on my ISA platform?
[/quote]

Think it's 1% on top of platform fees, or thereabouts. Really don't get what the fuss is with active fees. You either believe the fund manager is skilled in which case 1% is peanuts or you don't, in which case you shouldn't be anywhere near the fund.  It's not like it's 2+20.