Emerging Markets: Does the Category Make Sense ?

I have noted previously that I don't see much logic in the broad category of Emerging Markets. Nonetheless,virtually all asset allocation recommendations for individuals   and institutional allocations that I have seen  use this as an investment category.The "robo advisors" that have recently emerged also use emerging markets as an asset class.

But I have never understood why a category that includes countries with such diverse geographic and economic characteristics should form an asset class. Recent performance once again raises questions about the categorization.

Overall emerging markets have had a very strong performance as of late.  But for those taking a closer look the divergent performance of the overall emerging markets, Latin America and Asia components of the emerging markets index(which together make up around 90% of the index) should not be surprising  The economies are fundamentally different.  Asian countries are more exporters of manufactured products, having growing middle classes and have relatively stable political leadership. Latin America is dependent on commodity experts and and has a long history of political and economic instability.

I am old enough to have worked in the worlds largest bank in the world at the time Citibank which had made massive loans to the largest countries in Latin America particularly Brazil and Mexico. This period was followed by a huge debt and economic crisis as those countries and across Latin America.

The economic crisis hit causing a "lost decade" of economic growth in the 1980s. Thereafter many in the financial world would say this about Brazil (Latin America's largest economy): Brazil ( a little under 50% of the Latin American index)is the country of the future...and always will be.

In 1994 the currency ("tequlla ")crisis of Mexico also hit Brazil hard

Asia has not been immune from financial crisis and suffered a severe one in 1997 -1998

But 20 years later the Asian economies seem much stronger by nearly every measure: reserves current account (now in surplus), level of debt and GDP growth.

The situation in Brazil still looks bleak the economy has declined in GDP growth by -3.6% in 2016, inflation is at 8.7% and debt is 69.9% as a % of GDP. Mexico the next largest allocation in the index may face economic uncertainties if NAFTA is renegotiate, something the market may already be anticipating.

Here is a chart of the Mexican Peso:

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It is not surprising performance has diverged massively. Over the past 5 years emerging Asia is up 52%, Latin America -10.4% and overall emerging markets +22.5%

I always remain skeptical to make any predictions..particularly with regard to emerging markets. PIMCO is very bullish on Emerging Asia

Here are five year returns and country allocations for the overall emerging markets (VWO) Etf, Emerging Asia (GMF) and Latin America (ILF)

Emerging Markets ETFs EMerging Asia GMF (gold), Overall Emerging Markets VWO (Green), Larin America (ILF) (blue)

The country allocations are below:

Country Allocations:

VWO Emerging Markets

Country Exposure

	China	26.58%
	Taiwan	15.44%
	India	11.11%
	Brazil	7.23%
	South Africa	6.99%
	Mexico	3.86%
	Thailand	3.66%
	Russia	3.57%
	Malaysia	3.29%
	Hong Kong	2.10%
	Indonesia	1.83%
	Philippines	1.60%
	United Kingdom	1.45%
	Turkey	1.26%
	Poland	1.16%

GMF Asia ex

 ex Japan

 Country Exposure

	China	44.44%
	Taiwan	20.62%
	India	16.07%
	Malaysia	3.79%
	Thailand	3.71%
	Indonesia	3.14%
	Hong Kong	2.88%
	Philippines	1.97%
	United Kingdom	1.22%
	United States	0.95%

ILF Latin America

 Country Exposure

	Brazil	49.67%
	Mexico	25.74%
	Chile	7.90%
	Belgium	6.05%
	Peru	3.18%
	United States	3.01%
	Italy	1.84%
	Colombia	1.61%
	Spain	1.01%

Emerging Markets are notorious for performance chasing capital flows which inevitably buy high and sell low. Many analysts have see emerging markets as trading at rreasonable or attractive valuations for many months,particularly relative to US equities but it is clear that there is performance chasing money flowing into emerging markets with the flows turning positive a little over a year ago..Some are already raising cautions especially in the technology stocks in these markets ..

As can bee seen below money has been flowing into emerging and developed international markets as well after lo. As with most else long term investors benefit and performance chasers wind up losers.

Comparing the chart of fund flows below and the price chart at the bottom of the page it is clear some of the new money has been chasing performance.