Sunday, 23 March 2014

Investing History Lessons on Emerging Markets, Dividends from Credit Suisse 2014 Yearbook

The annual release of the Credit Suisse Global Investment Returns Yearbook is a delight. As before the free download 2014 Yearbook, written and compiled primarily by London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton, provides unique data - equity and fixed income returns for 114 years across 25 countries - and topical insights - this year on Emerging Markets.

The report is well worth the time for everyone to read, but here is what I found especially noteworthy:
  • Emerging Markets equity return volatility has dropped drastically since the 1980s from about 2x developed markets to only 1.1x today. In classic risk terms of volatility, emerging markets are not much riskier than developed markets.
  • Correlation of returns has been rising strongly due to globalisation but " emerging markets still offer useful diversification benefits". In other words we should keep an allocation to them in our portfolio. ... but ....
  • Canada's equity market is less correlated with developed markets than emerging markets (see chart page 10). In other words, for Canadian investors, it is more important for diversification to have a developed market holding than one for emerging markets.
  • Countries with the weakest currencies give the strongest future returns. 
  • Stock markets predict economic growth, not the other way round
  • Canada's real foreign exchange movement against the US dollar from 1964 to 2013 was 0.0% (see Fig.3 on page 41). Does a long term investor really need currency-hedged funds and their considerable drag that will exact a far greater and far more certain cost on returns?
  • Canadian investors seem to be the smartest in the world! In every other country, the buy and hold returns of an index exceeded the dollar / asset weighted returns of investors per the chart below based on this study published on SSRN. The lesson for the investor to avoid under-performing is to maintain a consistent asset exposure. 
  • China has given equity investors over the period  1993-2013 negative real returns (see page 42).
  • Dividends constitute by far the major part of equity returns over the long run. Per table 1 on page 27, of the total real return on equities averaged over 21 developed countries from 1900 to 2013, dividends provided 4.35% return while the total return was 4.54%! In Canada, the numbers were 4.35% and 5.75%. Message to corporations everywhere - show me the dividend. 

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