Global equity markets have recovered strongly following the financial crisis and recession. Large-cap developed market indices, such as the S&P 500 and the MSCI EAFE, generated gains of 91.2% and 90.8%, respectively, from their lows in March 2009 through the end of 2010. But those strong results were dwarfed by the incredible rebound in emerging market equities; the MSCI Emerging Markets Index surged more than 146% in the same period, leading many investors and analysts to believe that they were witnessing a decoupling of these markets.
Why the huge performance disparity? It can be attributed, in large part, to the fact that economic growth rates in emerging markets have far outpaced the anemic growth rates we’ve seen in developed markets. For example, China, India and Brazil experienced GDP growth of 20%, 18% and 7%, respectively, from the end of 2008 through the end of 2010. During the same period, U.S., U.K. and German economies logged growth rates of 2%, 0.70% and 1.30%, respectively.
While economic growth rates in emerging markets are still well above rates in developed markets, equity indices took decidedly different directions at the start of 2011. Through March 9, 2011, the MSCI EAFE and S&P 500 were in positive territory with gains of 4.80% and 5.40%, respectively. The MSCI Emerging Markets Index, on the other hand, lost just over 1%. The dispersion was even stronger earlier in the year; at one point in late February, developed indices were ahead of the emerging markets index by almost 10%.
If emerging market economies are so much stronger than developed market economies right now, why have their equity markets underperformed?
Dissecting the Diversion in Returns