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Where should your money be? In emerging markets or developed markets?

by , 25 August 2014

Have you ever wondered how emerging markets, like South Africa, compare to the performance of developed markets like the UK and the US?

If you look at the last ten years, emerging markets have been the place for your money to be. The performance of these markets has comfortably beaten their developed counterparts.

So what does the future hold? Are emerging markets set to continue to perform? Or are developed markets going to assert their dominance?

Let's take a closer look…

Comparing emerging markets with developed markets

For the ten years to the end of June, emerging markets have thrived.

If you look at the performance of the MSCI Emerging Markets Index, it has returned annually (including reinvested dividends) 12.3%. That’s well up on the 7.84% annual return of the MSCI World Index of Developed Markets.

But if you look a little closer, since the financial crisis in 2008, the performance of emerging markets has been very disappointing when compared with the five years before that.

Emerging markets have banked an annual return of 9.58%, Cris Sholto Heaton in Money Week explains. That’s way off the 15.62% annual return from developed markets.

How does the performance of emerging markets compare to developed markets over the long-term?

This isn’t an easy thing to look at as emerging markets lack the historic data available for developed markets. For instance, the MSCI Emerging Markets only came about in the 80s and 90s.

But London Business School’s Elroy Dimson, Paul Marsh and Mike Staunton, have put together an index dating back to 1900. They did this by including the performance of major emerging markets at particular times since then.

Have a look at the chart below which shows their data…

Emerging markets vs developed markets performance

It you look from 1900 to 2013, their research shows that developed markets outperformed by 8.3% to 7.4% in dollar terms.

This goes against what many investors believe, that emerging markets would have made you more money over the long-term.

What does the future hold for emerging markets?

Looking at the performance of emerging markets over such a long period of time may make you think that developed markets are the better place for your money. But that may not be the case.

The data that shows that the poor performance of emerging markets is mostly in the first half of the 20th century. During this time, revolutions and wars means that many emerging markets went through very tough times.

But once market stability returned, emerging markets performed better; 12.5% to 10.8% for developed markets.

The chart also shows that emerging markets struggled to beat the performance of developed markets in half the decades since the 50s. Yet, emerging markets trumped developed markets since the turn of the millennium.

What the data does suggest is that regardless of where you choose to invest, taking a long-term view is the best strategy to follow for both markets.

So there you have it, why it pays to take a long-term investment horizon wherever you choose to invest your money.

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The South African economy is struggling on the back of a wave of endless strikes… Your hard-earned rands are worth a fraction of what they were… And bonds, in our low-interest ‘stagflation’ economy just aren’t the prudent safe havens they once were.

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Where should your money be? In emerging markets or developed markets?
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