Bloomberg Multimedia created an interesting analysis of Emerging vs. Emerged markets (link). Although the 2000’s were a decade of impressive returns for Emerging Markets, Bloomberg suggest’s the next decade will be different. For their analysis, Bloomberg considers a coutnry with a GDP per capita less than $10,000 to be an “Emerging Market”. A good real-world tradable proxies are the ETFs, EEM – iShares MSCI-Emerging Markets (FYI Brazil, China, Taiwan, South Korean make up nearly ~50% of the fund) and EMB iShares Emerging Market Bond Exchange Traded Fund (Russia, Philippines, Brazil and Turkey make up ~30% with ~50% at BBB range)
The authors claims that although the countries themselves still remain poor in GDP per capita terms (and other measures) compared to the Developed World, returns on stocks and bonds have already “emerged” for Emerging Market countries. Their analysis highlights two key figures. One, the average gap in GDP growth between the Developed and Emerging world is beginning to narrow. By the mid 00’s the gap had widened to 5.2% and the World Bank is predicting this gap will continue to contract to just 3.8% over the next decade.
Source: World Bank, Bloomberg
Second, the authors point out that Emerging Market stocks are not as cheap as earlier in the decade, when in late 2001 the EM P/E vs US P/E ratio was a -12. It appears that P/E discount has all but disappeared. Additionaly, they claim that Emerging Market stocks also benefited from a cheap dollar, a trend which may not continue. (Keep an eye on UUP PowerShares DB US Dollar Index Bullish Fund).
The authors conceed that their may be short term tactical trades, such as Argentinian Bonds, but these targeted trades might be “as good as it gets.”
For investors, this means that last decade’s emerging markets generally still have the risks associated with lower-income countries but prices closer to those of high-income developed countries.
So those thinking of buying EEM to capitalize on a continued global economic rebound may be putting up more risk than the potential reward warrants.