Yes. Since it began in 1987 MSCI's emerging market index (in nominal US dollar terms) has actually fallen on average from May Day to Halloween. This isn't because of any one bad summer: they have fallen in more than half of the 28 summers since 1987. By contrast, the index has risen an average of 11.2 per cent from Halloween to May Day, and produced positive returns in 23 of these 27 periods. The difference between winter and summer returns is actually greater in emerging markets than it is in the UK or US.
| Emerging markets' seasonality | ||||
|---|---|---|---|---|
| Emerging markets | US | |||
| Winter | Summer | Winter | Summer | |
| Return ($) | 11.2 | -0.1 | 7.1 | 1.8 |
| No. of falls | 4 | 15 | 5 | 9 |
| Winter is Halloween to May Day; summer is May Day to Halloween. Based on prices changes since 1987. Source: MSCI | ||||
This fact should finally kill off one of the most persistent errors about emerging markets - that they owe their high returns to good economic growth. This has always been wrong, because across countries there is no correlation between GDP growth and equity returns. The fact that emerging markets lose money in (our) winters when their economies grow deals the myth another blow.
You might find this puzzling. The likeliest explanation for the seasonal pattern in UK and US equities is that our appetite for risk is seasonal; we become too cheerful as the weather improves in the spring and too pessimistic as the nights get longer in the autumn. However, many emerging markets are near the equator or in the southern hemisphere and so don't have the seasons that we northerners do.
This puzzle is easily solved. Emerging markets are increasingly part of a globalised market in which prices are determined by a global appetite for risk and this appetite is, for now, set largely by northern investors.
This matters because emerging markets are especially risky assets; not only are they more volatile than developed equity markets but they also carry more crash risk - the danger of doing really badly. This riskiness means that they are especially sensitive to changes in risk appetite, which makes them more seasonal than other equities. In this sense, emerging markets are seasonal for the same reason that, within the UK, cyclical sectors are more seasonal than defensive ones.
If this pattern continues - and there's little sign of it diminishing - then emerging markets could bounce back quite strongly in the next few months. If so, very serious people would attribute the recovery to an improving economic outlook. And they'll be wrong.
