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for starters – matter less. And in some cases, individual leaders can change institutions permanently. Not long ago, “emerging markets” referred to fast-growing but politically volatile countries where bad politics – a cataclysmic cycle of political corruption scandals (Brazil over the past few years), a dictator who invades a neighbor on a whim (Russia in 2008), regulators in bed with the sectors they were supposed to be looking over (much of Asia in the 1990s) – could erase years of market gains in a matter of days. Politics mattered in emerging markets a lot more than they mattered in more developed markets. In contrast – again, this is how it used to be – in developed markets like the U.S., Europe, and Japan, things were comfortable and easy, and there weren’t many surprises. Aside from special situations – changes in regulation or significant shifts in government policy that influenced one particular sector – politics were background noise for investors. For markets, there’s a big difference between emerging markets (“EM”) and developed markets (“DM”). Since emerging markets are seen as a lot less predictable than developed markets, they’re generally viewed as a lot riskier. So for years, emerging markets have traded at a lower valuation than developed markets. One of the best ways of measuring market valuations is to use the cyclically adjusted price-to-earnings (“CAPE”) ratio. It’s a longer-term, inflation-adjusted measure that compares price to earnings (that is, the P/E ratio we all know and love) to smooth out
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American Consequences
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