Emerging Markets or U.S. Stocks?: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
Read More.
a | A


The chart above comes to us from Research Affiliates. It notes:

Through March 31, 2014, the three-year cumulative return of emerging market stocks as measured by the MSCI Emerging Markets Index is -- 8.35%, while that of U.S. stocks as measured by the S&P 500 Index is 50.73%.

That raises a very interesting issue. The long-term trends favor emerging markets but they are nowhere to be found in the equity markets. Those weak numbers may be mean reverting soon.

My colleague Josh Brown has observed:

Emerging Markets stocks make up approximately 9 percent of the world's equity market capitalization but claim 52 percent of the world's total population. From a secular standpoint, we know that it is only a matter of time before this incongruity is corrected and EM stocks become a larger asset class relative to developed market stocks.

Emerging markets have well-known problems ranging from growing debt, country-specific deficit issues, inflationary pressures, political headwinds and even the threats of natural disasters and, in some cases, poor demography. Because of these concerns, investors have substantially underweighted these stocks in their portfolios.

The run of emerging markets between 1998 to 2006 was quite a ride. I have no idea when the performances of U.S. equities and emerging markets will flip but based on the latest valuations, when that happens, there will be a lots of money to be made.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net