View source for Emerging market stocks


{| style="float:right;"
||[[File:300px-Developing countries.png|thumb|left|400px| Fig. 1. Developing countries that are neither part of the least developed countries, nor of the newly industrialized countries]]
[[File:800px-Newly industrialized countries.svg.png|thumb|left|300px| Fig. 2. Newly industrialized countries as of 2010. This is an intermediate category between fully developed and developing.]]
|}
An '''emerging market''' is defined as an economy that is progressing towards standards of market liquidity, transparency, accounting regularity, and securities regulation which are standard features of what are termed "developed markets." <ref> [http://www.investopedia.com/terms/e/emergingmarketeconomy.asp#axzz2CtOcknpt Definition of 'Emerging Market Economy'], investopedia </ref> The term 'emerging market' dates from 1981 when Antoine W. Van Antmael, an official of the International Finance Corporation of the World Bank, first coined the term. Emerging market economies encompass nearly 80% of the world's population and make up 20% of its economies. <ref> [http://www.investopedia.com/articles/03/073003.asp#axzz2CtOcknpt What is an Emerging Economy?], investopedia </ref>

The map figures (Fig 1. and Fig. 2.) show the nations that are considered to be emerging markets. 

In 1992, Farida Khambata, an official at the International  Finance Corporation, coined the term ''"[[Frontier market stocks|frontier markets]]"'' for nations with smaller market capitalization and less liquidity than nations classified as emerging markets. <ref> [[Wikipedia:Frontier markets|Frontier markets]], wikipedia </ref>

Over time, national markets can migrate from the continuum of classifications, moving between developed, emerging, and frontier markets.  Argentina provides an example of  such migration. At the dawn of the twentieth century, Argentina was the seventh largest developed economy in the world. By the late 1960's, as a result of inflation and interest rate policies, the Buenos Aires stock market virtually disappeared.<ref> Jorion, Philippe, and Goetzmann, William N.,  1999.[http://210.34.5.45/cn/fm/Global%20Stock%20Markets%20in%20the%20Twentieth%20Century.pdf Global Stock Markets in the Twentieth Century], Journal of Finance 54:953-80., p. 970 </ref>. By the 1980's, Argentina was considered an emerging market. In 2009 Argentina was dropped into the frontier market classification by MSCI, Russell, and S&P.  

As of October 2012, emerging market stocks comprised 13.60% of the global equity market.

==Emerging market stocks==
[[File:Globalreturns.gif|thumb|500px| Fig.3. Global real returns (no dividends) from ''Jorion, Philippe, and Goetzmann, William N.,  1999.[http://210.34.5.45/cn/fm/Global%20Stock%20Markets%20in%20the%20Twentieth%20Century.pdf Global Stock Markets in the Twentieth Century], Journal of Finance 54:953-80.'']]

Many emerging market countries have stock markets dating back to the nineteenth century. However, reliable return data is not easily available for many markets. Current [[Indexing|index]] providers have measured returns since 1989. [[Philippe Jorion|Jorion]] and [[William N. Goetzmann|Goetzmann]] have examined global stock returns during the twentieth century and have published the results in their 1999 paper ''Global Stock Markets in the Twentieth Century''. The results of the study are graphically presented in Fig.3.

The data reflected in the table provides real returns, and due to the fact that dividend histories in many markets are not always available, the returns do not reflect dividends. Given that dividends in most markets averaged 4% during the twentieth century, adding 4% to the returns is a reasonable assumption for arriving at total real return. <ref group="note"> Jorian and Goetzmann measure returns for a global stock market index, weighted by GDP, for the period 1921 - 1996 and find an ex-dividend real return of 4.04% for the index, compared to a 4.32%  ex-dividend real return for the U.S. stock market. Jorion, Phillipe, and Goetzmann, William N., [http://210.34.45/cn/fm/Global%20%Stock20%Markets20%in20%the20%Twentieth20%Century.pdf Global Stock Markets in the Twentieth Century], Journal of Finance 54:953-80, 1999. </ref>

Jorian and Goetzmann also point out that the  historical returns record contains selection bias, since countries contained in the indexes are the ones that have been relatively successful.

==Risk, volatility, correlation==
A Vanguard white paper, ''International equity investing: Investing in emerging markets'', examines emerging market stock returns over the 1985 to 2005 period. The paper examines returns, risks, volatility, and asset correlations.

The paper notes that emerging stock markets, in addition to market and currency risks, are especially susceptible to the following risks:

*'''Political risks'''. Political instability can result from external conflict, coups, and racial and national tensions. 
*'''Economic risks.''' Economic policies and reforms can fail.
*'''Regulatory and operational environment'''. The quality of market regulation, corporate governance, transparency, and accounting standards is often below that of developed markets.
*'''Limits on investment'''. Foreign investment may be limited or taxed. 
*'''High industry/firm concentration'''. In emerging markets, a large share of a country’s stock market capitalization may be concentrated in a particular industry or company. <Ref name= "Vanguard white paper">[https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/IntEqInvestingEmMkt International equity investing: Investing in emerging markets], Vanguard, 04/02/2006 </ref>

Over the 1985 - 2005 period, emerging market stocks provided the following returns and [[Standard deviation|standard deviations]], a measure of volatility. Note that emerging market stocks were more volatile than both U.S. stocks and developed market stocks. Over the same period, emerging market stocks displayed an increasing correlation (rising to nearly 80%) with  both U.S. and developed stock markets. Correlations between emerging market countries also increased over this time period, but remained low (rising from 5% to 35%).  <Ref name= "Vanguard white paper"/> These low correlations between national emerging markets suggest that the high risk and high volatility of single nation emerging market stock returns can be prudently mitigated by diversifying emerging market investments over a wide selection of countries.<ref> Philips, Christopher B. CFA, Davis,Joseph H. Ph.D., Aliaga-Díaz, Roger Ph., and Kinniry Jr., Francis M. CFA, [https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvResEmergingexposure Research note: Emerging markets - Individual country or broad-market exposure?], Vanguard Research & Counseling, (04/05/2011)</ref> For example, the MSCI emerging market index annual returns have ranged from a low of -53.33% in 2008 to +78.51% in 2009. <ref group="note"> The MSCI Emerging Markets Stock index annual returns: <br>

{{#widget:Google Spreadsheet
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|width=600
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{{Spreadsheet|key=0Ao_KSkmSuU2rdFhrdGhQcUhkcXM2cW1HeXFlR0VvaUE}}</ref> This compares to the Thailand market, which provided a 113.8% return in 1993 and was followed by a combined loss of 86.7% over 1996 and 1997. 

{| class="wikitable" border="1" align="center"
|+ Comparative returns 1985- 2005
|-
! Market
! Compound return
! Volatility
|-
|Emerging Markets ||13.90% || 23.43%
|-
|US Market || 11.89% || 15.34%
|-
|Developed Markets ||11.27% || 17.14%
|}

==Emerging market indexes==
{{main|Emerging Markets Index Returns}}

Dow Jones, FTSE, Morningstar, MSCI, Russell, and S&P now provide emerging market indexes. Country representation varies among providers, as evidenced in the following table. The variation in index composition results in a dispersion of index returns.
{{Emerging markets country representation}}

==Emerging market index funds==
[[File:IndexvsActive.gif|thumb|450px| Fig.4. Index vs. active funds, [https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/EmergingIndex  Never judge a book by its cover: Why indexing can make sense for emerging markets], Vanguard (01/21/2010)]]
Vanguard introduced indexing emerging market stocks to retail investors on May 5, 1994. Currently, emerging market index funds are available tracking FTSE, MSCI, and S&P indices. <ref group="note"> For a listing of available funds, refer to [http://www.altruistfa.com/emergingmktsfunds.htm Emerging Mkts Funds]</ref>. Russell has filed with  the SEC for introducing an [[Exchange Traded Funds|ETF]] based on the Russell Emerging Market Index.<ref>[http://www.sec.gov/Archives/edgar/data/1476734/000119312510075953/dn1a.htm Russell SEC filing]</ref> Emerging market style index funds are available in the small cap style class. <ref group="note"> Refer to [http://www.altruistfa.com/emergingmktssmall%20funds.htm Emerging Mkts Small] for a listing of available options.</ref>  Indexing emerging market stocks is a prudent strategy, given that indexing has consistently outperformed the majority of active funds, as Fig.4 illustrates. <ref group="note"> SPIVA also finds the S&P/IFCI Composite emerging market index out performing active funds over one, three, and five years, [http://www.spindices.com/documents/spiva/spiva-us-yearend2011.pdf SPIVA  Year-End 2011 Scorecard] </ref>

==Suggested asset allocation==
{{See also|Lazy Portfolios|Three-fund portfolio}}
Investors wanting to include emerging markets in a portfolio might consider the following.

*Investors desiring to hold a market [[Asset allocation|allocation]] of stocks might consider holding a global stock market index fund, which would hold market weights of domestic market, developed market and emerging market stocks.
*Investors desiring to hold specific weights of domestic and international stocks, and wanting to hold a market weighting of developed market and emerging market stocks in the international allocation might consider holding a total international index fund.
* Vanguard suggests that investors should allocate between 10% to 15% of the international allocation to emerging market stocks.  <Ref name= "Vanguard white paper"/>
* [[Rick Ferri]], in his book ''[[All About Asset Allocation]]'', suggests that investors employing multiple asset class portfolios should hold [[Slice and dice international|equal weights]] of international indexes: a european stock index fund, a pacific stock index fund, an emerging markets stock index fund, and a small cap international index fund.

==See also==
*[[Emerging markets index returns]]
*[[Emerging market bonds]]
*[[Vanguard Emerging Markets Stock Index Fund tax distributions]]
*[[Vanguard Emerging Market Index Fund expenses]]
*[[Slice and dice international]]

==Notes==
<references group="note"/>

==References==
{{Reflist|30em}}

==External links==
*[[finiki:Emerging Markets|Emerging Markets]], finiki
* William Bernstein, [http://www.efficientfrontier.com/ef/998/global.htm Stocks? For the Long Run?], [http://www.efficientfrontier.com/search.htm Efficient Frontier]:article on  Jorion/Goetzmann, (1999), [http://210.34.5.45/cn/fm/Global%20Stock%20Markets%20in%20the%20Twentieth%20Century.pdf Global Stock Markets in the Twentieth Century]

===Bibliography===
{| border="0"
||'''White papers'''
* Davis, Joseph H. Ph.D., Aliaga-Díaz, Roger Ph., Cole, D.C. William, and Shanahan, Julieann CFA,'' [https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvResInvestEmerging Investing in emerging markets: Evaluating the allure of rapid economic growth]'', Vanguard Research & Counseling, (04/19/2010)
* Davis, Joseph H. Ph.D. and  Aliaga-Díaz, Roger Ph.D.,''[https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvResGlobalRecession The global recession and international investing]'', Vanguard Research & Counseling,(01/16/2009)
* Philips, Christopher B. CFA, ''[https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/ConsiderationsRecommendations Considerations for investing in non-U.S. equities]'', Vanguard Research & Counseling, (03/20/2012)
* Philips, Christopher B. CFA, Davis,Joseph H. Ph.D., Aliaga-Díaz, Roger Ph., and Kinniry Jr., Francis M. CFA ''[https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvResEmergingexposure Research note: Emerging markets - Individual country or broad-market exposure?]'', Vanguard Research & Counseling, (04/05/2011)
* Tokat, Yesim, Ph.D., ''[https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/IntEqInvestingEmMkt International equity investing: Investing in emerging markets]'', Vanguard Research & Counseling, (04/02/2006) 
;Academic papers
*Bekaert, Geert, Erb, Claude B., Harvey, Campbell R. and Viskanta, Tadas E., ''[http://ssrn.com/abstract=826454 The Cross-Sectional Determinants of Emerging Equity Market Returns]]'' (November 1996). Available at SSRN.  
*Bekaert, Geert and Harvey, Campbell R., ''[http://ssrn.com/abstract=225371 Emerging Equity Market Volatility]'' (June 1997). NBER Working Paper No. w5307. Available at SSRN. 
* Bekaert, Geert and Harvey, Campbell R., ''[http://ssrn.com/abstract=2344817 Emerging Equity Markets in a Globalizing World]'' (October 24, 2013). Available at SSRN. 
*Blitz, David and Huij, Joop, ''[http://ssrn.com/abstract=1757740 Evaluating the Performance of Global Emerging Markets Equity Exchange-Traded Funds]'' (February 8, 2011). Available at SSRN. 
*De Groot, Wilma, Pang, Juan and Swinkels, Laurens A. P., ''[http://ssrn.com/abstract=1600023 The Cross-Section of Stock Returns in Frontier Emerging Markets]'' (August 1, 2012). Journal of Empirical Finance, Vol. 19, Issue 5, pp. 796-818.. Available at SSRN. 
*Jorion, Philippe, and William N. Goetzmann, 1999. ''[http://210.34.5.45/cn/fm/Global%20Stock%20Markets%20in%20the%20Twentieth%20Century.pdf Global Stock Markets in the Twentieth Century]'', Journal of Finance 54:953-80.
*Rouwenhorst, K. Geert, ''[http://ssrn.com/abstract=115788 Local Return Factors and Turnover in Emerging Stock Markets]'' (July 1998). Available at SSRN.</small>
|}
 
{{Non-US stocks|state=uncollapsed}}
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