Emerging Markets: Leading or Following?

Are emerging markets leading the developed markets forward, or following their lead?

The answer may depend on when you start the observation.

Two key asset classes are stocks and bonds. Let’s look at total stocks and sovereign bonds for each of the United States, the non-US developed markets, and the emerging markets to see how they are doing.

The sovereign bonds in the non-US developed markets are denominated in local currencies, while the emerging market sovereign bonds are denominated in US Dollars.

This daily chart beginning March 6, 2009 shows emerging market stocks and sovereign bonds handily outperforming their counterparts in the United States and the non-US developed markets.

click images to enlarge

On the other hand, this 1-year weekly chart shows emerging markets stocks and bonds still underperforming US market and just catching up to the non-US developed markets.

Prevailing thought is that emerging markets have a brighter growth and profits future than the US and other developed markets. Certainly if the recent the rates of change continue, emerging markets will be the stars, although they could be ahead of themselves. It may depend on how economically coupled or decoupled they are with respect to the developed markets. The data on that is mixed.

China, for example (according to the World Bank’s June report) had YTD year-over-year industrial production growth of positive 7.4%, but YTD year-over-year export volume growth of negative 22.7%. Either domestic Chinese consumption (about 1/3 of their economy versus about 2/3 of the US economy) rose tremendously, or China has experienced inventory build-up. If inventory and not sales has explained their production, that is unsustainable; and the related run up in copper and oil may be equally unsustainable.

Those short-term considerations aside, we are on the side that favors emerging markets for long-term gains – for those who can handle roller coaster rides.

Securities mentioned in this article: VTI, VEA, VWO, BND, BWX, EMB

Disclosure: We have owned all of these securities from time-to-time in managed accounts.