Emerging markets have had a rough 2015. China has weakened its currency, effectively killed its futures market, and brought in CEOs from the U.S. to provide economic advice. Brazil’s currency has crumbled and the country’s debt has been downgraded to junk. Any list of the worst performing stock ETFs of 2015 will feature plenty of developing economies.
It’s easy to pick on emerging markets now, and logical to wonder if they will ever get back on track. But zooming out to a longer time horizon paints a slightly different picture. The chart below shows the performance of the MSCI China Index and MSCI Emerging Markets Index since 2001, along with a global stock benchmark and the S&P 500.
Data Source: MSCI, through August 2015.
Emerging markets are volatile. They lose most of their value and then rip off incredible rallies — like the five-year stretch from 2003 to 2007 when the third best year for the MSCI China Index was a 66.2 percent gain. There are huge obstacles — such as corrupt and inefficient governments and reliance on commodities — as well as massive demographic tailwinds.
So emerging markets bounce back and forth across their long-term trend line — sometimes rather violently. That makes them risky allocations for anyone with a limited risk tolerance or time horizon. As shown below, the MSCI China Index has traded quite a bit above and below its smoothed trend over the last 15 years:
Of course, a more recent starting point puts China and other emerging markets in a hole relative to the S&P 500 and global stocks. A $1 investment in China at the end of 2007 is worth just 86 cents today, while the same $1 invested in the S&P 500 would be worth $1.56.
China and other emerging markets have always been rather volatile. And the problems many emerging markets face now are substantial. But ruling them out completely might be a step too far.
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