Understanding Emerging- and Developed-Market Equity Performance

Navneet Kumar

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.