Emerging market sweet spot: high returns, low volatility and falling correlations.

by Jay Kumar and Frederick Do, September 2017.


Over a 12-month period to 31 August 2017, global emerging markets equity returned 16.9%, placing it amongst the highest returning market segments in the world. The spectacular return was driven by Asian region with 18.9%, Latin America and Europe, Middle East with 16.2% and African region with 15.1%. Looking beyond the regional level, European markets namely Poland (46.7%), Hungary (42.4%) and Greece (36.5%) ended the period as the three best performers. In contrast, Middle Eastern markets namely Egypt (-20.6%), Qatar (-19%) and Pakistan (-13.9%) were the three worst performers. This offsetting effect between European and Middle East markets explained the relatively weaker performance of the Europe, Middle East and African region.

Sector Returns

In terms of sectors, the return dispersion over the past 12 months was very high. Information Technology delivered 35.6% while Health Care delivered 6.3%. Moreover, Information Technology was the only sector consistently leading over all measurement periods from 1 year up to 10 years. In contrast, Energy and Utility sectors lagged quite noticeably over time. Elsewhere, Consumer Staples, which was the winner on a 15-year measurement period, had been rapidly falling off the ranks in the last 10 years. 

Size and Style

In terms of size and style, Large/Mid cap Momentum took the lead over the past year with a return of 23.1%, leaving Small cap Growth the weakest style with 4.9% per annum. Large caps beat Small cap over most time periods (1 year to 10 years) although the latter was stronger when measured over the last 15 years. Growth beat value over the past 1, 3, and 10-year periods. Looking at a more granular level, Large cap Growth, and Large/Mid cap Momentum provided the strongest returns in the last 10 years. 

Volatility and Correlations

Over a 10-year period, average volatility of emerging markets experienced a downward trend but with dispersion among countries remaining high. Average pairwise correlations also declined.

The cross-sectional average volatility of emerging markets decreased to below 20% in August 2017 from over 35% in September 2007. However, inter-market dispersion remained high with Greece and Taiwan amongst the most and the least volatile markets at 46% and 10%, respectively.

The cross-sectional average market-pairwise correlation remained low and saw a decline from 0.35 in September 2007 to 0.27 in August 2017. However, the inter-market range was very large. As at 31 August 2017, the 36-month correlation between The Philippines and India was the highest of any country pair. On the other extreme, Russia and Egypt showed a negative correlation.

The return, volatility and correlation behaviour across the emerging markets is quite unique and certainly bodes very well for active managers. We’ll explore this idea further in our October blog.