In its Global Investment Returns Yearbook 2014 Credit Suisse said while the argument for emerging markets has often been “put enthusiastically with exaggerated claims, usually based on GDP growth,” sentiment in the past three years has actually been overly pessimistic.
According to Elroy Dimson, Paul Marsh and Mike Staunton from London Business School developing markets still offer “important diversification benefits for developed market investors”.
They said the benefits for emerging- market based investors spreading investments across their home markets, other emerging markets, and developed markets are even greater.”
“Emerging markets provide exposure to additional economies, sectors, and types of business at different stages of growth.”
The yearbook said despite “legitimate concerns today over emerging economies, they mostly appear in better shape today and to be less risky than during the crisis prone 1980s and 1990s”.
The research also found that factors such as size and momentum have little impact on returns in emerging markets while value does have a strong influence on returns.
The yearbook examined value countries, defined as those with the highest start-year dividend yield, based on historical dividends in the previous 12 months, and found these countries generated an average return of 31 per cent between the years of 1976 and 2013.
Growth markets on the other hand, with the lowest start year yields only produced an annual return 10 per cent during these years.
According to the research this indicates that higher yielding countries outperformed the lowest yielders by 19 per cent each year.
The yearbook also discovered investing in countries that have recently experienced the lowest economic growth actually leads to the highest returns.
The research showed the annual return of these countries was 28 per cent, compared with the 14 per cent return for the highest GDP growth quintile.
