Some Interesting Arguments Against Emerging Markets Investing

In the mad dash to throw investment dollars at emerging markets stocks and funds, many investors have probably overlooked some very basic historical facts about the arduous path from developing nation to developed nation.

A key example is the fact that many of the emerging markets we are now chasing are emerging for the second or even third time!

From the Psy-Fi Blog:

The first thing to remember about emerging markets – that subset of the world’s stockmarkets that are representative of economies which aren’t fully developed – is that most of them were in the same state a century ago. To be precise most emerging markets have already emerged at least once, had a good look around at the benefits of a developed economy and then promptly sunk back into oblivion out of some combination of political maladministration, war, famine or simple sheer bad luck.

You’d be hard pressed to detect this from the performance figures associated with these markets because most of the statistics about them reflect only the period since their re-emergence. Such is the nature of survivorship data that these not infrequent busts have been expunged from the records as though they never existed. Viewed from today’s vantage point the concept that these markets could once again collapse is hard to credit, but history suggests something different – that emerging markets are dangerous, delicately balanced affairs and the path of true capitalism rarely runs smooth.

There’s some other great stuff in the post, including the fact that commodity-producing nations tend to have decades of depressed GDP after a boom as well as a reminder about mean reversions for the large cap indexes of these markets.

Source:

The Case Against Re-Emerging Markets (Psy-Fi Blog)