Domestic vs Emerging Market Performance

Two interesting data points today on the emerging markets and overseas performance:

First, a chart of Emerging Markets, to put into context the recent corrections.

Down 10 Days in A Row, (16 years)
Source: Birinyi Associates, Inc.


Paul Hickey of Birinyi Associates observes:

"Based on the Morgan Stanley Capital International Data, emerging market stocks are poised to trade lower for the tenth straight day for a total decline of over 10%. Since 1990, there have been three other occurrences where this index has had a similar string of down days in a row.

As the table below details, similar stretches of down days in emerging market stocks have been followed by additional losses with the end of the correction not occurring for another 20 to 47 trading days."

To help further contextualize this, have a look at the recent gains. For that, this perspective on emerging global market performance over the past 3 years is quite helpful, via  Crossing Wall Street:

Brazil (EWZ)………………..433.95%
Austria (EWO)……………..275.42%
Mexico (EWW)……………..242.81%
Sweden (EWD)…………….174.01%
Australia (EWA)……………165.13%
South Korea (EWY)……….162.61%
Canada (EWC)………………161.36%
Belgium (EWK)……………..151.58%
Spain (EWP)…………………143.78%
Germany (EWG)……………139.12%
Italy (EWI)…………………..116.39%
Japan (EWJ)…………………109.14%
France (EWQ)………………107.73%
Switzerland (EWL)…………98.81%
Hong Kong (EWH)…………..97.52%
U.K. (EWU)…………………….89.00%
Netherlands (EWN)…………82.27%
Malaysia (EWM)……………..68.05%
Taiwan (EWT)…………………67.08%

By comparison, the S&P 500 Spyders ETF (SPY) is up just 52.81%.


Thus, by implication, you might assume the outperformance of overseas markets could eventually subside, while the underperformance here should catch up.

Don’t jump to any contrary conclusions just yet: what you are seeing is to a large degree a mean reversion of sorts. Put this into perspective: in the 1990s, the US outperformed overseas markets — many dramatically — with Europe relatively slow, and Japan utterly flatlined.

Thus, these numbers above are the recent mean reversion of the prior 20 years or so . . . In other words, after decades of under-performing the US, emerging markets are now outperforming. I expect the mean reversion to last longer than the 3 years we just witnessed . . .

UPDATE: May 23, 2006 10:47am

Mike Darda of MKM Partners offers some perspective on the emerging market correction;

Meanwhile, the WSJ offers a trifecta of articels  on emerging markets:

Fairy-Tale Ending May Elude Economy

Losing Some Sizzle 

Jitters Over Rising Interest Rates Send Emerging Markets Tumbling

Foreign iShares Since 2003
Eddy Edelfenbein
Crossing Wall Street, May 17, 2006

Emerging Market Selling
Paul Hickey,
Birinyi Research, May 22, 2006
Trading Monitor  Volume 2006 Issue 68  (pdf)

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What's been said:

Discussions found on the web:
  1. anonimouse commented on May 22

    This is off-topic, but WTH, this is worth a read: from

    . . . Whenever the Federal Reserve discount rate has moved up to 6% anytime over the past 91 years, it has never failed to stop any stock market rally virtually in its tracks. As you might note from the history of the prior seven occasions of this 6% phenomenon, not only has the market been stopped in its tracks but with only one exception, it has been dealt a blow that would last for several years to come. The one exception occurred at the discount rate hike to 6% on September 4th, 1987. At that time, the market rally once again was stopped dead in its tracks but one could argue that the market was making new all-time highs just two years later and continued to do so over the next decade. There is, however, another side to that story. Within seven weeks of the September 4th, 1987 discount rate hike to 6%, the Dow Jones Industrial average suffered one of the worst crashes in its history and endured a decline of over 40% from its August 1987 high to its October 1987 low.

    Let’s examine the market action after the last rise to 6% on the discount rate. That occurred on May 16th, 2000, just over two weeks prior to the newsletter of June 2nd, 2000, that discussed the 6% phenomenon in detail. At that time, the market of choice for the vast majority of participants was the Nasdaq and, more specifically, the Nasdaq 100 (NDX) which is the index comprised of the largest 100 stocks in the Nasdaq Composite. When the Federal Reserve raised the discount rate to 6% on May 16th, 2000, the NDX closed that day at 3647. It had already declined 22% from its March 27th, 2000 all-time high. One might have thought that most of the damage had been done with that 22% decline. Those of you who saw our chart with the results that followed interest-rate hikes on the discount rate to 6%, however, were well prepared for what was to follow. Over the next 29 months, the NDX would decline a stunning 78% from that May 16th, 2000 close and 82.8% from its all-time high close of 4705 on March 27th, 2000.

    Let’s fast-forward to April 2006. On March 28th, the Federal Reserve raised the discount rate to 5.75% in a pattern that has seen successive 1/4% hikes over the past two years. The Federal Reserve has not suggested the last hike was the final one. The next hike will take the discount rate to what has always been a destructive level of 6%. The fearsome fact that would accompany such a hike in the discount rate is that the NDX has barely recovered 25% of the ground lost between the March 2000 top and the October 2002 bottom. On the other hand, despite the uniformly disastrous results for the Dow Jones Industrial Average following discount rate hikes to 6%, the same has not been uniformly true for the Nasdaq Composite Index. If you are a bull, you would pray that the Nasdaq results would be similar to the results following the October 26th, 1977 rise in the rate. At that time the Nasdaq Composite moved to a closing low just over one week later, then began a rally which would never again look back at the October 26th, 1977 price low. The history of the past century, however, suggests that was a true anomaly. A discount rate of 6% has been one of the most reliable and consistent indications that the market faced two potential options. The first option would be to experience some type of market crash. Two of the prior rate hikes to 6% closely preceded market crashes. In 1929, the primary top preceding the crash occurred 25 calendar days after the initial move in the discount rate to 6%. In 1987, the secondary top preceding the crash occurred 28 calendar days after the initial move in the discount rate to 6%. The second option based on the prior history of the Dow Jones Industrial Average in relation to 6% discount rates suggests the possibility of a relatively very long period of stock market under performance. One might argue we have already seen that over the past six years. That does not change the expectations based on prior market history.

    . . .

  2. Mr. Beach commented on May 22


    That is a great summary. But your conclusion about mean-reversion is a stretch.

    Emerging markets are going through a secular growth phase. BRIC (Brazil, Russia, India, China) nations have dramatically grown in the past decade.

    We are in the early stages of a dramatic realignment of growth on this fair planet Earth.

    As a investment guru — with your very own regular TV gig — if you haven’t already, I encourage you to plan a trip to see the growth in Asia first hand.

    It is one thing to know that Asia is booming — it is quite another to see Shanghai as it is today.

    Try this experiment: name the top 5 Chinese cities by economic output or population. Bet you can’t do it. Or how about, name the top 10 Chinese companies by market cap. Again — bet you can’t do it.

    It is critical for all investors to realize that the world is changing very quickly.

    In 20 years time, what will be the biggest bank in the world? What will be the biggest insurance company/car company/etc.?

    After China, you should swing down to Thailand, Singapore, and then onto India. Make sure you return via Dubai.

    Only after such a trip will the magnitude of global growth sink in.

    Good luck.

  3. Barry Ritholtz commented on May 23

    Mr. Beach

    We are in agreement — I dont think 3 years of Emerging market outperformance makes up for decades of underperformance.

    Thats before we get to what looks like a secular, structural shift in growth rates.

    Overseas markets can outperform for years; The key issue is really what happens overseas if/when we dramatically slow when all the stimulus here fades.

  4. royce commented on May 23

    Barry, looking at Vanguards index fund info, the ten year average of the S&P 500 and emerging market funds are almost identical. If the growth in three years is fast enough, you don’t need a decade of catching up. A three year growth rate of 44% is pretty extreme.

    Going forward, if growth of profits in emerging markets are explosive and the markets structurally different, it’s going to keep growing. But past results will have no bearing on that. You can only use history as a guide when you’ve got the same type of market now as you did in the past.

  5. Permabull commented on May 23

    The list of Exchange traded country funds you use is not a list of emerging markets – it’s actually closer to a list of all large global equity markets ex the US.

    Most of the country ETF’s listed are developed markets and, one might add, were the subject of continuous scathing commentary from US market observers from late 2002 onwards.

    BR: Good point — poor choice of words on my part . . .

  6. B commented on May 23

    Future outperformance without a severe correction in emerging markets will nearly be economically impossible. Not foreign markets but emerging markets.

    Without increases in hard asset prices, the YOY change in profits will slow substantially. That is, unless they’ve gone through some miraculous productivity driven transformation. They haven’t. They are too busy printing money given the commodity boom. Human behavior 101. With YOY increases in hard asset prices needed for increased profits, that will imply inflation is totally out of control globally. And equity markets hate runaway inflation more than they hate nearly anything else. Just as our rampantly inflationary bretheren in South America for a historical perspective.

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