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In this video blog for Sensible Investing, Robin Powell asks Professor Paul Marsh from London Business School what we can learn about investing in emerging markets from studying historical market data.

Transcript:

Hello again. In our last two videos we've heard from Professor Paul Marsh from London Business School about what history can teach investors in emerging markets.

He's one of the authors of the Credit Suisse Global Investment Returns Yearbook, which draws on data spanning 114 years of market history from 25 different countries.

Despite two-and-a-half years of poor performance and warnings of more volatility to come, Professor Marsh says now is NOT the time to lose faith in the sector.

But what, I asked him, does the data tell us about which trading strategies work best in emerging markets?

Interestingly, two factors which ARE important in developed markets, have little or no effect in emerging ones - namely, company size and momentum.

"If you look across emerging markets, smaller companies within those markets have done a little better on average than larger companies within those markets, but much lesser the gap, much lesser the premium from smaller companies than you find in developed markets, at least in recent years. Similarly momentum effects seem to be much weaker in emerging markets than in developed markets."

But the data does suggest that one factor has an even bigger effect in emerging markets than it does in developed ones... and that is value.

Value rather than growth stocks seem to have done especially well in emerging markets rather than developed markets. Value has done well in developed but in emerging markets the difference between value and growths stocks has been even greater. So if you are an investor, who focuses on trying to buy stocks that look cheap, relative to fundamentals like dividends and earnings, you find a very fertile hunting ground in emerging markets.

Now we're always hearing in the media that we ought to invest in this or that emerging market. Some prefer, say, India or China, while others favour Eastern Europe, South America or Africa.

But never mind the noise... What does the actual data tell us?

There doesn´t seem to be a small country effect. You don´t seem to better by investing in smaller emerging markets than in larger ones, nor does there seem to be a momentum effect whereby you do better from investing in winning emerging markets, rather than loosing ones. But there are very strong value effects, so if you invest in the markets which have had the highest dividend yields, you´ve done much better than if you would have invested in markets with the lower dividend yields. Or if you have invested in the countries with the weakest currencies versus the strongest currencies, you have done better from the weakest currencies. And if you look at past GDP growth, you have done best from the countries which have the weakest past growth, rather than the strongest, which suggests again a value effect when you´re looking between and across emerging markets.

And, for me, that's the most interesting finding of all.

So much of the commentary on emerging market investing in recent years has focused on high growth in the developing world.

The reason we need emerging market exposure, we've constantly been told, is that the economic balance is shifting from West to East.

But the data tells us that this focus on growth has actually been unhelpful.

We'd like to thank Professor Marsh for his insight - and you for watching.

Goodbye.

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