Day to day market movements often seem to suggest that emerging markets are highly correlated with developed markets, and in 2008 or 2011 emerging equity markets were not generally a useful place to hide.

By Hamlin Lovell

One perception is that globalisation, trade and economic convergence make the world more interconnected, and reduce the diversification benefits of crossing borders. Some observers have even argued that the emerging markets no longer deserve their name. But EM investment returns over multi-month, or multi-year, periods, can diverge from DM.

Equities
Between 2013 and 2014, developed equity markets were in a bull market, while emerging equity markets lost a small amount of value, as measured by MSCI indices. Mainland China stocks then had a 30% crash in 2015, helping to drag the EM index down by more than 15% in that year, while developed indices were close to flat.
Emerging markets found a trough in early 2016 – and anyone lucky or smart enough to have bought the lows might have doubled their money, two years later by early 2018. Over this recovery period, EM equities have generated roughly triple the returns of DM equities.

Over this recovery period, EM equities have generated roughly triple the returns of DM equities.

Economic growth
EM have been growing their economies faster than DM for many years, but many observers focus on the EM/DM growth differential. This narrowed between 2009 and 2014, then stabilised, and has been expanding since 2016. Both DM and EM growth have been accelerating in 2017, but EM has been increasing its lead. This has contributed to EM equity outperformance.

Commodities
Commodities are part of the story. The oil price also reached a six-year nadir in early 2016, and wider baskets of 20 or more commodities touched the lowest points since 1999. This is particularly relevant to commodity-producing countries such as Russia, Brazil and South Africa; though some other emerging markets are net importers of commodities, in aggregate EM are net exporters.
However, large and usually state controlled oil producers are no longer the largest parts of the EM equity indices. They have been replaced by the BAT complex (Baidu, Alibaba, Tencent); by firms such as Naspers where the valuation is largely derived from the Tencent stake, and by longer established tech firms like Samsung.

Large and usually state controlled oil producers are no longer the largest parts of the EM equity indices.

Though the surge in technology stocks is seen in both EM and DM, economic cycles are also different in emerging markets. Brazil has just clawed its way out of its worst ever recession, which saw the economy shrink by some 7% over 2015 and 2016. At that time, developed economies were growing steadily.

Interest rates
Little wonder, then, that Brazil has been through five interest rate cycles over the past nine years, when most developed economies held rates steadily around zero. In fact, all four of the BRICs have interest r