Blue Chip Issue 78 - Jan 2021

otherwise have to do for more well-known,
developed market companies. This often results in
people having to be on the ground in the country to
see and understand the various dynamics, which can
be a costly exercise.
Having said that, emerging market equities have
historically outperformed developed market equities.
In the long run, corporate earnings growth typically
drives equity market returns. And, unsurprisingly,
the key ingredient in driving corporate earnings
growth is economic growth (South Africans will be
acutely aware of this). From there it is a short leap
to arrive at the conclusion that economic growth
plays a vital role in driving longer-term equity
returns, although this is not necessarily the case in
the shorter term. Therefore, when thinking about
emerging market economies and equity markets, it
is easy to understand why emerging markets have
historically outperformed developed markets, given
that emerging market GDP growth has typically
outpaced that of more developed markets.
As we approach the end of the decade, it is quite
apparent that the past 10 years have seen a reversal
of fortunes for emerging market equities, as they
have lagged developed markets by a hefty margin,
There are a number of reasons why investors are
naturally drawn to developed market equities
as opposed to emerging market equities. These
include the obvious points that developed equity
markets are larger (as alluded to above), more
established and more liquid than their emerging
market counterparts, and as such present a
larger opportunity set for investors. Alongside this,
emerging markets are also viewed as inherently
riskier than developed markets given the potential
lack of accounting standards, corporate governance
and transparency issues, volatile currencies, political
uncertainties, a lack of analyst coverage and the
inability to completely trust what is presented in
annual reports and on company websites. In this
way, investing in emerging market companies
requires far more research than what one may
as illustrated in graph 1. There are a few reasons for
this. Firstly, low interest rates in developed markets
have helped bolster developed market equities in
what has been a lower growth environment over the
past decade.
Graph 1: Developed vs Emerging Market
Equity Returns: May 1990 – May 2020
Annualised Total
Returns (%)
12
10
8
6
4
2
0
-2
-4
-6
1 Year
Developed Market Equities
5 Years 10 Years 20 Years 30 Years
Emerging Market Equities