Per MSCI, emerging-markets stocks made up about 11.6% of the global stock market (using the MSCI All-Country World Index as a proxy) as of the end of September. Thirty years ago, these stocks represented less than 1% of the world's investable equity market capitalization. These markets are dynamic by definition. They have changed dramatically in the past three decades, and the pace of change has only accelerated in recent years.
The MSCI Emerging Markets Index was launched on Jan. 1, 2001. From its inception through the end of September, the index's annualized return amounted to 9.89%, versus 4.99% for its developed-markets counterpart, the MSCI World Index (returns are presented in U.S. dollars). Though these headline performance figures are compelling, they belie the gut-wrenching volatility that has characterized this span. During this period, the emerging-markets index's standard deviation of monthly returns and maximum drawdown were 22.07% and 61.59%, respectively. The comparable figures for the MSCI World Index were 15.19% and 54.03%, respectively. Emerging markets' path to greater absolute returns has been a winding one.
Recent years have been particularly taxing for investors in emerging-markets stocks. From the time that the emerging-markets index's cumulative performance peaked relative to developed markets in October 2010 (see Exhibit 1) through the end of 2016, the MSCI Emerging Markets Index fell 1.1% on an annualized basis, while the MSCI World Index generated annualized gains of 8.74%.
