پویایی چرخه کسب و کار بازارهای توسعه یافته و تنوع زمانی بازده دارایی ها در بازارهای نوظهور

This paper empirically studies the predictability of emerging markets’ stock returns by business cycle variables and the role of developed markets’ business cycle dynamics in this respect. The evidence shows that the link between business cycles and future stock market returns among emerging markets is considerably weaker than among developed markets. By contrast, I find strong evidence of stock return predictability by the respective country’s dividend-price ratio. This latter finding could reflect that variation in dividend-price ratios potentially reflects both the temporary impact of “hot money” inflows on emerging markets’ asset prices and rational expectations of future returns.

Both the global financial crisis in 2007-2009 that originated in developed markets and the unconventional monetary policy measures by these countries’ central banks in its aftermath have strongly affected emerging markets. While bond yields in developed markets reached record low levels, investors searching for yield flocked to emerging markets’ assets. This contributed to tremendous exchange rate volatility prompting Brazil’s finance minister to warn even of a “currency war” in a widely cited speech in 2010.1 However, at the same time, excess returns - a proxy of risk premia - on emerging markets’ stocks showed similar dynamics as excess returns on developed markets’ stocks. Fig. 1 illustrates this point for Brazil relative to the US over the period from Q4 2007 to Q2 2012. The upper panel depicts quarterly changes in the nominal exchange rate of the Brazilian real relative to the US dollar. Positive values indicate a depreciation of the real against the dollar and vice versa. We observe a lot of volatility. Periods of strong depreciation of the real are followed by quarters of pronounced appreciation. By contrast, despite the strong exchange rate dynamics, excess returns on the two countries’ stock markets basically move in sync as the lower panel of Fig. 1 shows. While the exchange rate volatility can potentially be rationalized by the relative performances of the Brazilian and the US economy during that period, the strong common movement of the two countries’ stock market returns raises the question if the state of the Brazilian economy plays any role for the Brazilian stock market at all.

This paper has assessed if business cycle dynamics are useful signals of subsequent returns on ten emerging markets’ stock markets. It pays particular attention to the potential impact of developed markets’ business cycle dynamics, approximated by the two first principal components of the G7 countries’ output gaps, on stock market returns of emerging markets. I find some evidence in favour of the view that business cycle dynamics signal future stock market excess returns. However, this finding pertains only to a minority of the emerging markets under study and is thus considerably weaker than for the G7 countries. In addition, the potential impact of country-specific business cycle variation is not negligible. Finally, this paper has evaluated the predictive power of dividend-price ratios for the respective country’s stock market excess returns. Temporary deviations of prices from their fundamentals (dividends) indeed predict excess returns on emerging markets’ stocks. This evidence is most pronounced for those emerging markets for which the output gap does not exhibit predictive power. This latter evidence could, on the one hand, reflect the inflow of “hot money” to emerging markets which induce asset prices to move away from fundamentals. On the other hand, these findings could also plausibly reflect rational expectations of future stock market returns. While settling this debate is beyond the scope of this paper, it could be beneficial for future research on this issue to study emerging markets more deeply.