Given the opportunity to guess which country’s stock market has generated the highest calendar year return most often in the past 25 years, I’m pretty certain you would work your way well down a list before you came up with the actual answer.
In fact, you may be surprised that this country even has a stock market.
Mark Mobius, Executive Chairman of the Emerging Markets Group at Franklin Templeton Investments covered this topic in a rest blog post.
Our research showed that in the 25 years we studied from 1988 – 2012, and of the 72 stock markets in the world we examined, there wasn’t a single market that was the best performing for two consecutive years.2 And only one market was the best performing in four of those 25 years; Turkey. Only two markets were the best performing for two years; Russia and Argentina.
- Turkey (4 years: 2012, 1999, 1997 and 1989)
- Russia (2 years: 2001 & 1996)
- Argentina (2 years: 2010 & 1991))
Of the remaining 69 countries, only 16 countries had one year as being the best performing as shown in the table below. The rest of the 53 countries had not even one year of being the best performing. It’s interesting to note that China and the US are not on the list. This reminds me of another truism of successful investing; being different. If you invest where everyone else feels comfortable, you may not be investing in the right place. In investing, we believe sometimes being unpopular can be the key to success, and the right time to invest can be any time at all. (emphasis added)
Market No. of years market was top performer Turkey 4 Russia 2 Argentina 2 Brazil 1 Colombia 1 Croatia 1 Egypt 1 Greece 1 Indonesia 1 Israel 1 Jordan 1 Kenya 1 Mauritius 1 Pakistan 1 Poland 1 South Korea 1 Sri Lanka 1 Switzerland 1 Trinidad and Tobago 1 Tunisia 1
Source: Franklin Templeton Investments; MSCI Indexes.
MSCI Gross Official Index (in U.S. dollar terms) was used for each market.
This list is dominated by countries that are considered emerging markets. This segment of the global stock market has had a rough time, declining by nearly 10% year-to-date through June 30.
U.S. stocks have performed much better this year but have arguably been bid up to current values that are stretched beyond justification from the underlying earnings of the broad U.S. stock market.
Emerging markets, on the other hand, while out of favor, have become more attractive.
PIMCO Investments suggests that emerging markets stocks are better positioned to generate long-term returns than U.S. stocks. The measure of value PIMCO uses to evaluate future return prospects is the Shiller 10-year price/earnings ratio, which looks at the past 10 year’s actual earnings. Emerging markets had a 13.5 price/earnings ratio on June 30, well below the 16.9 average since 1995. Starting from this valuation point, PIMCO suggests annualized forward returns at 19.0% over five years and 13.8% over 10 years. Alternatively, the U.S. Shiller P/E was at 23.2 on June 30, 41% higher than its average going back to 1881. From this point of valuation, the projected returns are in the low single digits.
If rebalancing your global stock allocation is necessary, it may make sense to increase emerging markets weight — ideally buying low — rather than reducing emerging markets weight in response to low returns. If you would like to increase emerging markets exposure but prefer to do it in a less volatile way, there are mutual funds and exchange-traded funds that provide exposure to emerging markets but utilize strategies to reduce the amount of fluctuation in this asset class compared to simply holding an emerging markets index.
- How much emerging markets weight you have in your portfolio?
- Do you know the difference between developed international market and emerging markets?
~ Gary Brooks, CFP — Brooks, Hughes & Jones — Partners in Wealth Management — Tacoma, WA
Past performance is not indicative of future returns.