Understanding Emerging- and Developed-Market Equity Performance
March 17, 2021
An important part of the equity-investment puzzle is understanding the risk premium of an investment or market. That is, what type of returns have they offered investors over and above a “risk-free” asset.
The chart below shows the average annual equity risk premium of countries from 1998 to 2020. Emerging-market countries have, on average, outperformed developed markets but experienced greater dispersion of returns. Of course, it’s prudent to temper any historical analysis, using it as more of a coordinate rather than a roadmap, as past performance is no indication or guarantee of future performance.
For example, Russia had the highest average risk premium over the study period, largely because the period started with a performance trough in the Russian equity market which subsequently rebounded. Greece, on the other hand, had the lowest average risk premium — in fact, it was negative. Greece suffered extensively from the 2008 global financial crisis, and MSCI reclassified it from a developed to an emerging market in 2013 over concerns about investor accessibility, liquidity and shrinking market size.
Historical Average Annual Equity Premium by Country
Based on MSCI Country Investable Market Indexes. MSCI Data from Dec. 31, 1998, to Dec. 31, 2020