Why TSX investors should be cheering on the rally in emerging markets
The past three months have seen the MSCI Emerging Markets Index blast ahead of the S&P 500 and S&P/TSX Composite Index. But domestic investors shouldn’t worry about being left behind: Returns for emerging market equities and Canadian stocks have been virtually identical over the longer term.
Since Halloween, 2022, the MSCI Emerging Markets Index’s 23.5-per-cent return easily outdistanced the S&P 500’s 6.9-per-cent mark and the Canadian benchmark’s 7.7-per-cent mark (10.1 percent in US dollar terms). The TSX has been trailing developing world equities recently, but history suggests this won’t be the case for long.
The accompanying chart shows the longer-term returns on $1,000 invested in each of the MSCI index and Canadian stocks. Importantly, the emerging markets return is converted to Canadian dollars to provide a like-for-like comparison.
Despite the major differences in economic structure – Canada is a modern, services-oriented economy – the difference in cumulative returns over 10 years is remarkably low at less than $100.
Commodity prices are the main reason for the similarity in performance. Developing world growth is more resource-dependent than in G10 countries, requiring more commodities per unit of GDP growth. Thus when emerging countries are growing strongly, commodity demand and commodity prices climb, benefiting profits for the large percentage of the TSX in resource sectors.
The MSCI Emerging Markets Index is more volatile than the TSX – the peaks and valleys of the blue line on the chart have greater amplitude. Over time, however, market history suggests similar returns for both, and Canadian investors should feel free to cheer on the ongoing rally in developing world stocks.