Do developing country equities have a higher return and/or lower risk than emerging market equities, when measured in the emerging market's currency? Do you have data for this over a long timeframe (decades), ideally for multiple countries?

For example, US stock returns in dollars is different from US stock returns in rupees. I'm interested in the latter.

The reason I ask this question is that I've been advised to keep most of my money in Indian equity (I live in India) and only a small fraction like 15% in foreign equity because foreign equity pays less. I'd like to validate this with data. Does foreign equity pay more or less when measured in rupees (or other emerging market currency)?

3 Answers 3


Do developing country equities have a higher return and/or lower risk than emerging market equities?

Generally in finance you get payed more for taking risk. Riskier stocks over the long run return more than less risky bonds, for instance. Developing market equity is expected to give less return over the long run as it is generally less risky than emerging market equity. One way to see that is the amount you pay for one rupee/lira/dollar/euro worth of company earnings is fewer rupees/lira and more dollars/euros.

when measured in the emerging market's currency?

This makes this question interesting. Risky emerging currencies like the rupee tend to devalue over time against less risky currencies euro/dollars/yen like where most international investment ends up, but the results are rather wild. Think how badly Brazil has done recently and how relatively well the rupee has been doing. This adds to the returns (roughly based on interest rates) of foreign stocks from the point of view of a emerging market investor on average but has really wild variations.

Do you have data for this over a long timeframe (decades), ideally for multiple countries?

Not really, unfortunately. Good data for emerging markets is a fairly new phenomenon and even where it does exist decades ago it would have been very hard to invest like we can now so it likely is not comparable.

Does foreign equity pay more or less when measured in rupees (or other emerging market currency)?

Probably less on average (theoretically and empirically) all things included though the evidence is not strong, but there is a massive amount of risk in a portfolio that is 85% in a single emerging market currency. Think about if you were a Brazilian and needed to retire now and 85% of your portfolio was in the Real. International goods like gas would be really expensive and your local currency portfolio would seem paltry right now.

If you want to bet on emerging markets in the long run I would suggest that you at least spread the risk over many emerging markets and add a good chunk developed to the mix.

As for investing goals, it's just to maximize my return in INR, or maximize my risk-adjusted return.

That is up to you, but the goal I generally recommend is making sure you are comfortable in retirement. This usually involves looking for returns are high in the long run, but not having a ton of risk in a single currency or a single market. There are reasons to believe a little bias toward your homeland is good as fees tend to be lower on local investments and local investments tend to track closer to your retirement costs, but too much can be very dangerous even for countries with stronger currencies, say Greece.


What you were told isn't an absolute truth, so trying to counter something fundamentally flawed won't get you anywhere.

For example: chinese midcap equities are up 20% this year, even from their high of 100%. While the BSE Sensex in India is down several percentage points on the year. Your portfolio would have lost money this year taking advice from your peers. The fluctuation in the rupees and remnibi would not have changed this fact.

What you are asking is a pretty common area of research, as in several people will write their dissertation on the exact same topic every year, and you should be able to find various analysis and theories on the subject. But the macroeconomic landscape changes, a lot.

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    I think the very last sentence is the key. Even if this question could be answered for some specific point in time, the answer will be different at some other (sufficiently distant) point in time. It will also be affected by the individual investor's level of risk, investing goals, etc.
    – blm
    Nov 25, 2015 at 2:45
  • Which is why I asked for data over a long timeframe (decades). As for investing goals, it's just to maximise my return in INR, or maximise my risk-adjusted return. @CQM, mind summarising the consensus amongst the research on this topic? Do developed country equities generally have a higher or lower return (or risk-adjusted return)? Nov 25, 2015 at 6:50

First of all, the answer to your question depends on your starting dates and ending dates. So developed markets returns are higher over one period, and emerging markets returns over other periods. So far, there does not appear to be a systematic tilt in favor of one or the other.

The reasons are as you said. Emerging markets tend to have higher returns in nominal terms, but developed markets currency movements (sometimes) cancel this out. So watch out for periods of strong and weak developed markets (e.g. U.S) currencies. In "strong" currency periods (such as those of the past five years or so), you want U.S. market exposure, and in "weak" currency periods, the larger nominal local returns will be fully reflected in dollar terms as well.

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