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Elliott Morss | December 21, 2014

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Two Global Economies: Still Only One Stock Market?

Introduction

 On February 9 of this year, I posted an article calling for investors to put their money in African, Asian (excl. Japan) and Latin American equities. My reasons included: 

  • the high growth rates and low debt of these “new world” countries should cause their markets to perform better than those of the “old world” (the US, Europe, and Japan) mired in recession and debt;
  • their economies should also outperform the old world because of their growing middle classes, a real engine for growth;
  • sooner or later, the US dollar should weaken, so get out of dollars by investing elsewhere.

Some argue that because there is such a high correlation between all markets, it does not matter where you invest. There is some merit to this argument. As I pointed out in a recent article, the stock markets of many emerging nations are quite thin, and Westerners move in and out with great frequency. Also, whenever there is a global panic (there have been many recently), the world sells stocks and buys US dollars. And when this happens, new world stock markets generally fall more than old world markets.  

Table 1 provides the results since my February article. I use a combination of indices, mutual funds and ETFs in this table. It does appear that at least for this period, new world markets are outperforming old world markets. I also include trailing P/E ratios, and the new world P/Es are not outrageously high. Maybe stock market investors are starting to think globally.

 Table 1. – Stock Market Performance

  2/9-8/13 P/E Ratios
Country/Index/Fund/ETF % Change (ttm)
India (MINDX) 22.1% 15.5
South Africa (EZA) 12.4% 14.0
China (MCHFX) 12.0% 13.2
Latin America (PRLAX) 9.5% 13.5
South Korea (EWY) 6.9% 10.0
Brazil (EWZ) 5.0% 14.0
Japan (Nikkei 225) 3.9% 38.4
UK (FTSE 100) 3.2% 13.6
US (S&P 500) 0.8% 17.9

Sources: Yahoo Finance, the Bespoke Investment Group

 On the question of volatility, I calculated the betas for the New World investments in Table 1 – percent change in item divided by the percent change in the S&P 500 for all trading days going back to January 1, 2007. No question – with the exception of India and China, far more volatility in the new world markets.

 Table 2. – Betas

  Beta
Country/Index/Fund/ETF Value
India (MINDX) 0.87
China (MCHFX) 0.95
Latin America (PRLAX) 1.37
South Korea (EWY) 1.41
South Africa (EZA) 1.48

Source: Yahoo Finance

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