EM Capitulation Was A Foreseeable Investor Error
Last spring we wrote a lot about the history of Emerging Market (EM) overperformance. That historically it tends to overperform developed markets; that it does not always overperform; the conditions under which it does overperform.
First, the tendency towards overperformance:
This chart shows periods when being a Developed Market (DM) positively correlated with performance in green. The red represents times when development status (i.e. being DM as opposed to EM) negatively correlated with performance. In short, the times the bar is green is when DM tended to do better than EM, and the times the bar is red is when DM tended to do worse than EM. There’s more red than green, meaning most of the time, EM tended to do better.
But EM does not reliably overperform — note that in the final four periods above, the correlation between being DM and performance was positive. This was a poor environment for EM in general.
Are there certain conditions which tend to precede or accompany EM overperformance? Yes, there are, and we discussed them in the briefing last year.
One important precondition is that EM tends to bounce back better after a global crash.
The top line bar chart shows overall performance of an equal weighted portfolio of national stock markets. It’s a broad measure of global stock performance spread equally around the world. The bottom line bar chart shows EM overperformance compared to DM. Green bars are times when EM did better, and red when it did worse. You can see that EM was significantly more likely to outperform DM in periods after a global bear market. Note this visually by looking at the diagonal arrows.
We saw large global market sell-offs early in 2020 which implies that, if the historic pattern held, overperformance of EM was likely to follow. We will see below that EM did in fact overperform in coming out of this global crash.
The other conditions that we looked at in regards to conditions favoring EM are U.S. central bank interest rate policy.
The data showed clearly that there was a very noticeable pattern which favored EM when the U.S. was not engaging in substantial rate hikes. Since rates were unlikely to be hiked as per very clear declarations from Fed Chairman Jerome Powell…
… then likely the interest rate outlook also favored EM.
What this suggested was a second factor favoring a recovery that favored Emerging Markets. Here’s what happened in the last quarter:
Clearly, this data sets shows overperformance of EM compared to DM. Latin America particularly performed well.
Portfolios that capitulated on EM and shifted to DM early in 2020 faced significant headwinds when it comes to performance issues.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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