Emerging Markets Crisis Investing

Emerging markets’ history of high volatility and low returns has hardly been attractive for investors. Despite overly optimistic views from promoters like the World Bank, $100 invested in EM equities in 1989 would be worth $1,450 today, compared to nearly $2,000 if invested in the S&P 500. This underperformance has been driven by the frequent and severe crises from which, compared to their developed counterparts, emerging market indices are less likely to recover.

Paradoxically, these crises are caused by EM bulls who inject vast amounts of capital into these markets, causing them to crack either from unsustainable growth or from negative macroeconomic effects, such as widening current account deficits or high inflation. When that happens, those same promoters are quick to pull their capital out of the country, amplifying the crisis even further.

But what if investors simply invested in the months after these crises, rather than buying-and-holding emerging markets investments?

We studied every EM crisis since 1987 (71 crises over the 18 most tradeable markets) and found that it can be possible to reap excess returns by only investing in the two years immediately after a crisis, an approach we call “crisis investing.”

We have distilled our study of emerging markets crises into a 56-page in-depth report. Over the next three weeks, we will highlight a few key sections of the report. We have also included a link to the full report below. We hope you enjoy reading our new study.