An Investing Lesson

| March 05, 2018
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Emerging Markets, Volatility & Valuations

Great insights into the above three themes from WisdomTree.

Emerging Markets Outperform During The Correction

One thing we found interesting was that during the height of the correction, the MSCI Emerging Markets Index outperformed the S&P 500 by almost 150 basis points (bps) on the downside. Given that the EM asset class historically has had a standard deviation about 50% higher than that of the S&P, EM investors who may have expected the performance of EM to be worse than that of the U.S. were likely pleasantly surprised.

Why? Potentially Better Valuations

The EM outperformance brings to mind a concept that Jeremy Grantham has written about: beta is a critical component of explaining relative performance, but valuation can influence beta. Assets that are more expensive relative to their history may experience volatility above their expected levels (and vice versa). When an asset’s price outruns its fundamentals, a downturn in the market can be disproportionally negative when the music stops.

How Historically Has A Spike In Volatility Effected Emerging Markets?

On a closing basis, the recent high on the VIX was 37.32, set on February 5. Dating back to 2007, of all 163 instances when the VIX reached levels at least that high, the MSCI Emerging Markets Index had positive returns over the next year on every single occasion—with the average one-year return at 69.9%. While VIX spikes admittedly were clustered around a handful of key events, the results each time were unanimous.

VIX vs MSCI EM Table

Key Conclusions

The big takeaway from our research? The higher the levels reached by the VIX, the higher the forward returns tended to be for EM.

The tough lesson here for investors is to embrace volatility. Where a rising VIX typically equates to a short-term equity sell-off, EM investors who historically have used the dips as buying opportunities often made out well.

 

Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O

 

Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Meyer Capital Group), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Meyer Capital Group. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Meyer Capital Group is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Meyer Capital Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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