Head(wind)s or tail(wind)s?

By: David Onyett-Jeffries

David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP) and provides macro-economic guidance to GCLP and its affiliates— Alta Capital Management LLC and GuardCap Asset Management Limited.

After a strong start to the year, Emerging Market (EM) equities lost momentum and struggled to regain traction as stocks in Developed Markets (DM) rallied. The result has been a widening performance gap and another year of underwhelming returns for EM investors (MSCI Emerging Markets Total Return Index1 +11% year-to-July) versus their DM counterparts (MSCI World Index2 +19%) in US dollar terms.

That said, these aggregates mask the fairly notable variance under the hood and somewhat exaggerate the gap in returns for many investors.

For starters, the strong relative performance of DM equities this year has not been a case of a rising tide lifting all boats. Instead, it has been the product of an extremely narrow subset of stocks soaring while the rest have been bobbing closer to the surface.

Indeed, half of the gain recorded in the MSCI World Index over the year-to-date can be attributed to the returns on stocks of just 10 US companies that account for less than 15% of the index’s weight.

Any portfolio that does not hold these stocks, or is underweight relative to the market benchmark (such as value or income-biased strategies), is very likely underperforming the core index by a fairly significant margin.

For example, absent the near 70% weighted-average increase in these 10 American (Tech and artificial intelligence (AI)-adjacent) stocks, the other 1,496 stocks in the DM equity benchmark are up by a far more modest 12% — with EM keeping pace.


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