Author Topic: Emerging Markets.. both return-enhancing and risk-reducing  (Read 484 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.