Tuesday, July 29, 2008

No Premium to Developed Country Equity

One might think that, because systematic risk begets return, investing in developing countries might be a good place to sock away some money and experience the 'risk premium'. But over the past 10 years, the average USD returns to 17 prominent developed countries was about the same as the annual return is the US.

The only places I have seen a risk premium, are the following: the short end of the yield curve (overnight to 3 years), the Baa-Aaa spread, and the equity risk premium. If you know of any others, I'd like to learn of them.

Annual Equity Returns in USD, 6/95-6/08
AnnRet Country
29.00 RUSSIAN
20.88 BUDAPEST
19.72 BRAZIL
15.83 EGYPT
15.51 PRAGUE
13.60 SHANGHAI
12.62 TEL AVIV
9.73 POLAND
8.80 INDIA
8.52 SAFRICA
7.69 TURKEY
6.48 CHILE
4.25 ARGENTINA
2.78 TAIWAN
2.33 SKOREA
-4.40 THAI
-8.80 MEXICO
9.68 avg

8.65 S&P500 (USA)

8 comments:

J. said...

On the basis of what are you are assuming that Tel Aviv or Prague or Taiwan is more risky than S&P500 ? Volatility?

Ekonomix said...

Hi Eric,

I don't know about other countries but your annual equity return of -26% for Turkey is clearly wrong. My calculations show that between 6/95 and 6/08 Turkish market (ISE-100) went up by about 230% in USD terms. This is close to 10% annual.

This adjustment will increase the overall average to 9.8% from 7.7%. The risk premium for these 17 countries becomes about 1%. However, considering the several costs of investing in these countries, I am not sure it is high enough.

Eric Falkenstein said...

J: I'm thinking mainly in terms of Peso problem risk, as Rietz (1988) and Barro model

ekonomix: thanks. dunno how that happened.

Anonymous said...

1. the collective risk of the emerging group is not higher than SP due to diversification
2. majority of investors in these markets are locals and to them it's not riskier than SP
3. arbitrarily chosen period includes the dotbomb in the US. i bet the picture is different for the last 5 years.

Anonymous said...

do you know what are the prob of default of subprime vs prime? in normal times. roughly. i don;t know where to get this from and would be interesting to work backwards applying this ratio to what mer sold yday. thx

Anonymous said...

For the emerging markets: Is that a simple average, or is it weighted by market cap or economy GDP?

Eric Falkenstein said...

These are returns to the country's major market indices, in the same way the S&P500 represents the US. So generally it is value weighted for each country.

Kirill said...

Could you shift the time horizon by 5 years in either direction and post the results?