Source: Stocks for the Long Run by Jeremy Siegel (5th Edition), Page 65
If you are unfamiliar with the term “GEM” please refer to the performance tab of this website for more information.
I was reading Jeremy Siegel's classic book Stocks for the Long Run in greater detail today. In it, there's a chart for projected share of world GDP by country (above) that has me thinking. This chart suggests that emerging markets may produce a larger % of world GDP: from 45% currently, to possibly 70% in under 3 decades.
I have no doubt stocks should be the core of GEM (I'll explain this in a separate post), but the question is whether US vs. non-US stocks is the right split for GEM. Based on the chart above, wouldn't it be better if GEM’s split is developed vs. emerging market stocks?
First, GEM’s creator Gary Antonacci points out the problems with emerging markets as a core holding:
- Very high and unusual volatility
- Low liquidity/high transaction costs
- Accounting unreliability
- High fund expense ratios
- Limited market history
Second, I want to show how the current GEM setup (which uses a US vs. non-US stocks split) would be able to take care of the economic scenario shown in the above chart. Here’s three reasons how:
- If emerging markets grow faster than developed countries, then the country holdings of ACWX (the ETF representing non-US stocks in GEM) would shift accordingly. This is the beauty of the GEM strategy as momentum is even working on the ETF level: Strong countries gain a larger share of ACWX while allocation to weak countries shrinks.
- Developed countries are increasingly generating revenues from emerging markets, so this helps partially offset risk of growth slowing in the developed world.
- Siegel points out that as an increasing number of people in developed countries retire, their assets would be bought by increasingly wealthier investors in emerging markets. Yes, I know, this is a shocking realization. But it would keep the assets of developed markets in demand over the long-term.
In a future post, I will show how GEM is robust in different currency environments as well. More to come, stay tuned!