Bonds from emerging markets have outperformed stocks in the past 30 years

From Morningstar:

In 1994, investing in emerging markets through mutual funds was seen as the new opportunity, but the reality in the past 30 years has shown a different outcome. Bonds from emerging markets outperformed stocks significantly, with an annualized return of 7.33% for bonds compared to 4.58% for stocks.

One explanation for this unexpected outcome is the strength of the US dollar, which has negatively impacted emerging markets stocks while benefiting bonds. Despite this, emerging markets have shown strong economic growth compared to the US, challenging the traditional belief that stocks outperform bonds over time.

Lower valuations have also played a role in the underperformance of emerging markets stocks, with a slight decrease in price/earnings ratio since 1994. The combination of direct and indirect currency losses, along with reduced investment valuations, has contributed to the disparity between emerging markets stocks and bonds.

Looking ahead, while some forecasters expect emerging markets stocks to outperform developed markets in the future, past promises of growth have not materialized. Factors such as potential weakening of the US dollar, rising P/E ratios for emerging markets stocks, and improving profit margins could change the narrative, but skepticism remains about the long-term potential of the asset class.



Read more at Morningstar: When Bonds Beat Stocks: Emerging Markets