With the gradual inclusion of A-shares, the country’s weighting is expected to grow further. Its weight in the EM indexes has grown rapidly from just 3% in the early 2000s to 39% today.
Today, they comprise 14% of the free-float investable universe of world equities and 43% of GDP. As recently as 20 years ago, EMs made up less than 3% of world equity market capitalization and 24% of GDP.Relevance of emerging countries for global markets is increasing They then recovered even faster from the initial pandemic collapse. In the second decade since the turn of the millennium, investors were fortunate markets recovered quickly from the global financial crisis, which was followed by more than a decade of strong returns.Three bear markets in just two decades have provided a timely reminder of the considerable risk involved in equity investment. Since then, real equity returns have been below their historical averages, despite the strong recovery since 2009 and the successful weathering of the pandemic storm. Investors benefited from high returns in the 1980s and 1990s.Since 1960, EM equities have outperformed DM equities by around 1.5% per annum. This underperformance can be traced back mostly to the 1940s. Over the very long run, since 1900, EM equities have underperformed developed market (DM) equities by 1.4% per year, while EM bonds have underperformed by 2.2%.While all markets were exposed to COVID-19, a number of EMs were fast to get the virus under control, including China, South Korea and Taiwan (Chinese Taipei), which together represent about two-thirds of the overall value of EMs.Japan (7.4%) is in second place, ahead of China (5.1%) in third place, and the UK (4.1%) in fourth position. The USA remains the world’s largest equity market by a huge margin, and today accounts for 56% of the world’s investable, free-float market capitalization.Prospectively, the authors estimate that the equity risk premium will be around 3½%, a little lower than the historical figure of 4.4%, but still implying that equity investors can expect to double their money relative to short-term government bills in 20 years, despite the low real interest rate environment.For the world as a whole, equities outperformed bills by 4.4% per year and bonds by 3.1% per year. Since 1900, equities have outperformed bonds and bills in all markets.Over the last 121 years, global equities have provided an annualized real USD return of 5.3% versus 2.1% for bonds and 0.8% for bills. Equities still remain the best long-run financial investment ahead of bonds and bills.Recovery, however, in the USA and many other markets was exceptionally swift fueled by massive fiscal and monetary stimulus then later in the year, markets were driven higher by news of vaccines. The market fell 35% in just 23 trading days. The stock market crash triggered by the spread of COVID-19 was the most rapid in history, apart from the October 1987 Crash.Long-term perspectives favor equity investors The 2021 Yearbook provides detailed analysis of emerging markets (EM). 23 of these countries have 121 years of data since 1900. It now covers stocks, bonds, bills, inflation and currencies in 32 individual markets (including 9 new markets this year) and the 90-country world index. Published by the Credit Suisse Research Institute in collaboration with London Business School, the Credit Suisse Global Investment Returns Yearbook is the authoritative guide to historical long-run returns.
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