Download Key drivers of Emerging Market Stock Returns

Accessing Listed Emerging Markets – Key
drivers of Emerging Market Stock Returns
Christopher Laine, Senior Portfolio Manager
State Street Global Advisors
Point 1:
Don’t Listen to Your Economists (that often)
Economic Growth is a Necessary, but
Insufficient Condition for Positive Equity
Returns
Key Drivers of Emerging Market Stock Returns
China vs. Mexico: A Stylised Example
China’s Growth has Exceeded Mexico by 7.6% p.a. for Twenty Years
15
600
20-Year Avg. Chinese GDP Growth: 10.3% p.a.
20-Year Avg. Mexican GDP Growth: 2.7% p.a.
500
10
%
5
400
0
200
-5
100
-10
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
300
China
Source: MSCI, SSgA, IMF
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
20
But Did Shareholders Benefit….?
Mexico
Key Drivers of Emerging Market Stock Returns
Growth is Only Important if it Translates into Improving Return on Equity
$2.5
$2.0
$1.5
P/B Multiple
$1.0
ROE ex Dividends
Dividends
$0.5
FX
$0.0
-$0.5
Source: MSCI, SSgA
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-$1.0
Key Drivers of Emerging Market Stock Returns
Back To China vs. Mexico
From 1997-2003, Returns were Below the Cost of Capital for China
25
20
15
China
10
Mexico
5
China: “We issue Equity because it is cheaper than Debt.”
Source: MSCI, SSgA
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Point 2:
Don’t Forget About the Small Guys:
There is A Nice Liquidity Premia to Collect
Key Drivers of Emerging Market Stock Returns
David Trumps Goliath (Again): Small Countries Outperform in Emerging Markets
Small is Beautiful or The Anti-BRIC Strategy
Annualised
Returns
(Since
Inception)*
Annualised
Standard
Deviation
(Since
Inception)*
Large
5.22
25.52
Mid
4.40
26.16
Mid-Small
11.20
24.08
Small
15.59
22.08
14
12
Smallest Countries
Small/Mid
Mid/Large
Large
10
8
6
4
2
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
0
* January 1998 to January 2013
Source: MSCI, SSgA.
Point 3:
Watch out For Unrewarded Risk
Key Drivers of Emerging Market Stock Returns
The Return to Beta is Not What You Would Expect
Average Annualised Monthly Returns vs. Beta for Equal Weighted
Portfolio (Emerging Market Universe) 1996-2013
Average Annualised
monthly return (%)
15%
10%
5%
0%
-5%
-10%
< 0.4
0.4 - 0.6
Past performance is not a guarantee of future returns.
This information is for illustrative purposes only.
Source: SSgA
0.6 - 0.8
0.8 - 1.0 1.0 - 1.2
Axioma-Beta
1.2 - 1.4
1.4 - 1.6
1.6 - 1.8
1.8 - 2
>2
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