I wouldn’t say I was predicting returns would be low in Emerging Markets over the past few years, but it didn’t surprise me either.
I was reading an article on slow growth in China and it reminded me of the investment environment at the end of 2009. You see, Dec 31, 2009 capped a decade of negative returns in the S&P 500. But Emerging Markets, well they had shot through the roof over the decade. This was used in countless illustrations from financial advisors showing clients why diversification is important. And it is true. the 2000s were not too bad if you had sufficient diversification into international markets, especially emerging markets. The only problem is that even though these advisors showed illustrations of the benefits of diversifcation after this decade, very few of them actually recommended proper diversification at the start of the decade. Remember that the start of the 2000s was still tech-boom territory.
Here is a chart of the S&P 500 vs. the MSCI Emerging Markets index for the 2000s. The S&P 500 ends the decade down -9.10%. Emerging Markets were up 154.28%.
By the end of 2009, most people seemed to have a “feeling” that emerging markets would continue to do better. The dollar might collapse in value. China was buying all our debt and manufacturing our products. It seemed obvious.
But since 2010 started it has been a different story. Here is a chart of the S&P 500 and the MSCI Emerging Markets index since January 1, 2010.
Emerging Markets are up a mere 7.7% over this time period. The S&P 500 is up 58.86%.
Surprised? Remember that with investing, future trends are never as “obvious” as they seem. If a trend is obvious to you then it is probably obvious to a lot of other market participants. Once everyone knows something, it gets priced into the market and you can’t take advantage of it anymore.
So if an asset class like gold or real estate or emerging markets or commodities has done well for 10 years, don’t expect it to necessarily continue, even if it seems obvious that the trend can’t be stopped. If there is one thing that history has taught us, it is that these trends do reverse themselves eventually, usually when the financial media least expects it. Nothing outperforms forever.