Growth and Returns in Emerging Markets

Edited by Peter Blair Henry and Prakash Kannan

in International Financial Issues in the Pacific Rim

Published by University of Chicago Press

Published in print August 2008 | ISBN: 9780226386829
Published online February 2013 | e-ISBN: 9780226387086 | DOI:
Growth and Returns in Emerging Markets

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This chapter examines the empirical validity of the following rationale for investing in the stock markets of developing countries—that high rates of economic growth in emerging markets provide great absolute investment opportunities. The chapter is organized as follows. Section 8.2 discusses how average realized stock returns in emerging markets over the last 30 years have not been significantly higher than realized stock returns in the United States. Section 8.3 constructs measures of expected returns using dividend-price ratios and earnings yields. Section 8.4 presents short vignettes that focus on inflation stabilization and capital account liberalization episodes in Latin America and Asia. Section 8.5 discusses a simple and consistent explanation for high growth with low returns in Asia, and low growth with high returns in Latin America. Relative to the low expectations for Latin America at the start of the 1980s, the region achieved better outcomes than Asia over the next 20 years. This hypothesis is consistent with the results of the regressions carried out in Section 8.4, where unexpected returns were shown to be positively correlated with unexpected growth.

Keywords: stock markets; investments; developing countries; Latin America; Asia; economic growth; emerging markets; inflation; capital account liberalization; stock returns

Chapter.  10299 words.  Illustrated.

Subjects: Business and Management

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