Posted inEmerging MarketsEquities

EM equity returns


Emerging market stocks have not succeeded to keep up pace with their developed market peers in the post-financial crisis period, and volatility has been much higher. This year, the MSCI Emerging Markets Index is again set to underperform its developed peers.

Inverting the index

In 2013, fund managers had been expecting too much from emerging market equities. However, they hadn’t yet learnt their lesson as they again enormously overshoot their expectations in the beginning of the year. Their greatest misjudgement occurred in January. A year earlier, eight in 10 asset management companies were convinced emerging market equities would return more than 5% in the next 12 months. In reality, they would have lost 2.51%.


Methodology: in the graphs, we compare what fund managers predicted would happen to the index over the following 12 months (the bars) to the actual performance (the dots). The bars use the left-hand scale and go from -100 (all managers think the market will drop 5% or more in the following 12 months) to +100 (all managers think the market will rise 5% or more in the following 12 months). The dots use the right-hand scale to what actually happened to the market. The red line indicates a 5% market gain. If the spots match the bars then mangers predicted correctly. For the manager predictions, Skandia collects every month the house views of 15-20 global fund management groups.

In June, amid Fed tapering fears, asset managers suddenly made a 180-degree turn. They now expected emerging market stocks to be a money-losing investment over the next year. But again, they were enormously wrong. Fund managers again increased their expectation in autumn as emerging markets had not been as badly affected by the ‘taper tantrum’ as they had feared. This change in sentiment made them score only a second ‘right’ in October.

From absolutely right to very wrong

Summing things up, the contrast between US and EM equity prediction accuracy is striking. For US equities asset managers were infallible, scoring 12 out of 12. But for emerging market stocks, volatility cost fund managers dearly. The difference between the highest and lowest annual returns amounted to close to 20 percentage points for the asset class. So let’s accommodate the asset managers a bit, and take a more predictable asset class for the next edition of this series, due tomorrow: Japanese equities. 

Platinum members can view the full details of the latest EIE Manager Sentiment Survey here.

Part of the Bonhill Group.