At a time of global stock market weakness, large emerging market countries — the top 10 countries by market cap within the MSCI Global Emerging Markets (GEM) index which includes the BRICs, Indonesia, and Mexico among others — have returned to outperformance, while smaller emerging markets have lagged, according to a new report by Citi analysts Geoffrey Dennis, Howard Park and Christina Wood.
Most of the gains in the large economies emerged after the asset class bottomed in early-October:
“As recently as October 5, the day after the MSCI GEMs index hit its 2011 low, small markets were still performing in line with large markets year- to-date. However, during the strong rally in EM equities off the October 4 low (MSCI GEMs is up 12.4% since then), size has led performance. Since that date, large markets have risen by 12.1%… Meanwhile, small markets have rebounded much less (by just 7.8%).”
Moreover small markets have underperformed due to local events rather than external global macro events. The Arab Spring left Egypt as the worst-performing emerging market of the year. Political uncertainty in Peru and weak macro fundamentals in Turkey have caused their respective markets to lag.
Here’s a chart from Citi that shows how the MSCI GEMs performed since October 4, 2010:
Year-to-date, however, the BRICs have had a bad year down 22.1%, far worse than small markets. In fact the best performing large emerging markets were non-BRIC nations like Indonesia, Korea and Malaysia:
“Amongst the BRICs, only Russia (-14.2% year- to-date) has been a decisive outperformer of GEMs this year (-18.9%), although China is only just an underperformer at -19.9%. Brazil (-22.7%) and India (- 31.6%) have had very bad years.”