We previously established that emerging markets (EM) tend to outperform developed markets (DM) a majority of the time. When does EM outperform DM? Is there a pattern to this over time?
The chart below shows the correlation between level of development and performance.
When the bar is above the zero line and green, that means there was a positive correlation between being developed and higher performance. When the bar is red and below the line, that means there was a negative correlation. In other words, red is when the “EM advantage” works.
Is there a pattern to seeing when EM tends to outperform DM? There is. Let's look at the data.
The chart at the top is the average total performance of both the EM and the DM portfolios for six-months periods.
The chart at the bottom is showing EM overperformance (in green) or underperformance (in red).
Then we drew lines connecting certain periods of general, both EM and DM portfolios, significant negative performance down and over one period. The pattern is that EM tends to have relative overperformance after crashes. EM's best environment is not towards the top of a bubble, and certainly not when a bubble bursts, but when things go back to normal after a crash.