Emerging markets indexes: is investing in China and India a free lunch?

Stocks are just companies on the stock exchange.  The FTSE 100 represents the 100 biggest UK firms, whilst the S&P represents the biggest firms in America.

So would it make sense to invest in fast growing economies like India and China?  It does make sense, but investing isn’t always rational.

The figures below are for the approximate price of the three exchanges, at three strike points, between 1996 and 2018.

Market Price in December 1996 Price in December 2006 Price in January 2018 Approximate percentage increase from 1996 until 2018
US S&P

750

1,400

2,800

273%

India BSE

2,900

9,800

35,000

1,106%

Shanghai Stock Exchange

800

5,000

3,400

325%

What is interesting about the above figures, is that both China and India have been growing consistently since 1996, but China has been growing faster than India.  But the Bombay Stock Exchange has performed better than China’s, and is up compared to 2006-2007 and the financial crisis.

China’s exchange, in comparison, has done well since 1996, but it is still down compared to 2006.  In 2007 it hit a 6,000 record, and it is now trading at half of that figure.

Emerging markets are more volatile in general.  A rational investor can take advantage of the volatility through asset allocation.

In the CFA institute Gregg Fisher found having emerging markets and US markets in a portfolio, reduced volatility and sometimes increased returns.

He found for his data series (the years he choose) that both the US and Emerging markets produced an average return of 8%, which is a little lower than if one looks at the maximum possible returns, which are 10% for US markets from 1900 until today.

However, he find that “If you put 50% in the US market and 50% in emerging markets and rebalance every couple of months, you will earn closer to 9%”.  That is a whole 1% higher every year for the data serious he choice.

Asset allocation is really one of the only free lunches around.  Even if you don’t go for 50%-50%, having 10% of your portfolio in emerging markets never hurts.

Blog Comments

What do you forecast about India’s stocks?
What do you think its volatility for another 1 year from now?
What are the factors that affects the Indian stock market from in relate to western stock market?
Is it a good Idea to choose to invest now in India since stock prices are already at peak point?

Thanks for your message Cheethan. A few things:
1. I would avoid forecasting
2. I would avoid a high correlation to India
3. With numbers 2 notwithstanding, long-term we are a long way from a peak in Indian markets. US markets have been going up for 200+ years. When markets hit their peak as humanity we are in trouble, because it means human innovation has come to an end.

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