Why I’m too greedy to invest in India and China

I don’t own a single emerging market investment.  Why not?  Because I’m greedy, and I want the largest long term profits I can get my hands on.

And I really want someone to prove me wrong on this one—because I’m either crazy, or conventional wisdom is about as bright as a bar of soap.

Conventional wisdom suggests that high risk investors putting their money in Emerging Markets will reap the long term rewards of castles painted in the sky, if they can stomach the volatility.

But all of the research I’ve done on this thesis reveal the opposite:  invest, for the long term, in emerging markets, with high GDP rates and you’ll make less money than if you invested in slow growing, stodgy markets.

In Kenneth Fisher’s book, The Only Three Questions that Count, he gives long term stock market performance data for Japan from 1971 until 2005. Japan’s stock market (an economy that grew rapidly during that time) underperformed both the U.S. stock market (a slower growing economy) and the UK stock market (an even slower growing economy).

Fisher’s data on Japan’s total stock market growth in Appendix I, pages 397-399, don’t compare as favourably to the data in Appendix B and F—the respective U.S. and UK levels of stock market growth.

The data in Jeremy Siegel’s Stocks for the Long Run, third edition, reveal similar data showing that $100 invested in the Japanese markets in 1969, with all dividends reinvested, would have turned into $2,923 by 2001.  And the same $100 would have turned into $3,344 in the U.S. market, and $3,722 in the UK stock market.

Even during the short time period from 1998 to 2009, an investor in the Japanese markets would only have made half of what an investor in the S&P 500 (U.S.) would have made.  See it here

It’s true that the emerging markets can offer a hairy ride, and short term, profits can be substantial, but after ironing out the meteoric rises and killer crashes over the long term, there aren’t  the kind of returns I’d expect.

Comparing the emerging markets index (EEM) over the past two years to the S&P 500 index doesn’t reveal a significant advantage for the emerging market investor either. See it here

Focussing on one of the fastest growing economies of all leads us looking at China.  From 1997 until 2007, China’s GDP grew by leaps and bounds.  And its stock market was like a hairy roller coaster.  But during that time, its performance lagged the S&P 500.

Not until its recent two year performance has its stock market exceeded the U.S. market.  Fidelity’s China Fund paints a fairly accurate performance picture.  See it here

Longer term, David Swenson, Yale University’s famous endowment fund manager suggests that there may not be adequate returns with emerging markets either:

“Investors in emerging markets equities require substantial expected returns…[but] during the period for which good data exist, investors received inadequate compensation for risks incurred”

He explains that from 1985 (when reliable data was first available for emerging markets) to December 2006, the emerging markets lost more than a percentage point a year to the S&P 500 index, while losing 0.4% to the first world international stock index (Swenson, Pioneering Portfolio Management, pg. 179).

What makes it worse is that most investors usually perform more poorly in emerging markets than the returns of the emerging markets themselves.  Sexy markets and promising high growth industries attract plenty of attention from speculators. 

And sadly, because most of them jump into markets and stocks that have risen a great deal over a short period of time, (getting in too late) they tend to miss out on the gains that may have already occurred before they jumped on board, only to set themselves up just in time for the pain of the eventual correction. 

It hurts to think of the “investors” who sold out in late 2008 after the 75% bath the Chinese market took in the preceding 12 months.  Considering the inadequate long term returns—considering the risk– that’s not the kind of volatility I want to put up with.

Investors who sit tight in emerging markets for many years will likely earn returns (if history is an indicator) that are nearly as good as those returns established in stodgy, slow growing economic markets.  But sadly, too many people jump in and out of these kinds of markets—and their expectations are far too high.

To the detriment of their success, they end up buying high, after a short term skyrocketing, and end up selling out of fear during a market skydive.

I’m not even going to bother buying emerging market investments.  I’m too greedy.   I think I can make a lot more money investing only in places where I can safely drink the water from the taps..

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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4 Responses

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  2. I just want to add that I recognize that Japan is not an emerging market economy (far from it). But Japan's economic growth was meterioc during the last 40 years, yet its stock market underperformed slow growing economies–such as those in the U.S. and England.

    Data on actual emerging market economies doesn't reveal stock market growth that significantly compensates risk–despite all the talk about the great growth potential, in tems of profits.

    And considering that the U.S. was once an emerging market, you would think that its long term stock market returns would have trumped England's–because it destroyed England in every capacity of economic growth. But the two stock markets have performed similarly when accounting for capital gains and reinvested dividends over a very very long time period.

    If you can think of a counter-argument that supports conventional wisdom, I welcome it.

  3. Buffett-Boy says:

    You refer to the U.S. as a "slow growing economy" over the past 40 years?

  4. Andrew Hallam says:

    The U.S. was only a "slow growing economy" in my comparison with Japan. But it's all relative. A 2:20 marathon runner could be considered "slow" in the right company–because there are a few select people who can run under 2:06, and they'd be devastated to run 2:20.

    The U.S. has experienced healthy growth–from an emerging market, 200 years ago, into the world's largest market based on capitalization. But someone sticking with England's market as a long term investor, for example, wouldn't have missed out on anything special by not investing in the U.S. over the past 200 years–assuming they were Methusalah-esque.

    That's my argument against investing in China and India. Growing economies can be more volatile, but there's no evidence I can find supporting that long term investors in fast-growing economies will be compensated more handsomely than those who are just invested in developed markets.

    One other thing that needs looking at, relative to India and China, is this: Have you ever noticed how, when you travel around the globe, acculturation is occurring, thanks to the media, internet, TV etc.? When more people in China, or Thailand or Vietnam move from third world to first world existences (and yeah, the majority of people in all three of those countries still live an extremely poor existence) do you think they seek out material purchases and services and practices that are extensions of their old cultures? Some might, but as an aggregate, they start living like we do: buying lunch at McDonalds, drinking Coca Cola, socializing at Starbucks, using Micrsoft and Apple products.

    It's easy to argue that as they move from third world to first, more and more people are going to consume more Western products. As much as they may want to perpetuate their own customs, they move further and further towards our way of living, and our products. As a prolific traveler in South East Asia, I see it with my own eyes. An analyst sitting in a Wall Street cubicle, and touting the emerging markets won't see what you'll see for yourself if you get on a plane and have a look.

    So in many ways, China and India's growth will feed the U.S. and European economies as well.

  5. Andrew Hallam says:

    The most perfect microcosmic example is right under my own nose: Singapore. I live in a country that went from Third World to First in a single generation. In the 1960s, many people still lived in Kampong villages and many had shacks on stilts over the water–as they still do in various areas of Indonesia, which is a short boat ride away.

    Two years ago, I spent a week on one of these Indonesian villages. We defacated (excuse the crudeness here) straight into the ocean from a sheltered designated crack in the boards on a dock, that dropped straight down to the water. There was no toilet paper. No electricity. We stayed in local shanty shacks on the dock, where the locals had their homes. And nobody had a bed. Locals slept on the wooden floors. And so did we. There was no running water.

    With the help of a translator, an old man of the village told me something like this: "What happened to Singapore? They were just like us. And now, look at them."

    He was struck with admiration and wonder. And Singapore, in case you don't know, is one of the wealthiest city states in the world. It's ultra-modern. Out of 4 million people, we service 44 Starbucks stores, for example–or perhaps Starbucks services us. Based on what people buy in this bustling downtown metropolis, you can't tell the difference between Singapore and New York: Gucci, Tiffany's, The Gap, Cartier, Louis Vuitton, Burberry, Dolce Gabana, Coach, Zara.

    To get this impressive list of brands, I just asked my students at Singapore American School (where I work) what their favorite brand names were, and these were what they listed. A stroll along Singapore's Orchard Road, the main shopping district, confirms it. Singapore is predominately Chinese, culturally, but note their insatiable thirst for high-end western products. And South Korea is even crazier about this stuff.

    So, how did moving from third world to first world affect Singapore's stock market? According to former prime mister Lee Kwan Yew's autobiography, GDP growth easily outgrew Britain's and the United States' GDP growth over the past 40 years. In fact, Kenneth Bercuson and Robert G Carling suggest in their book, Singapore: A Case Study in Rapid Development, that from 1960 to 1991, GDP grew by 8.25% annually, exceeding growth in all of the world's industrial countries easily, and exceeding every SE Asian country, with the exception of South Korea. Annual GDP growth in Singapore from 1960 to 1991 was more than four times greater than the GDP growth during this time in the U.S., according to Bercuson and Carling.

    Would it surprise you to know that the U.S. and British stock markets have outperformed the Singaporean stock market over the past 21 years? (This is the longest period I can find data for)


    Sure, some growing economies could end up with great long term stock market returns. But as an aggregate, they don't appear to reward investors handsomely enough–especially considering their volatility.

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