Stocks for the long run? Evidence from emerging markets

• Stock returns in emerging markets (EM) exhibit some predictability from 1999 to 2012.
• The main predictor of EM stock returns is the book-price ratio.
• The economic relevance of the single-period demand for EM stocks is substantial.
• The economic relevance of the long-run demand for EM stocks is relatively low.
• For domestic and international investors EM stocks are mainly assets for the long run.

We estimate the myopic (single-period) and intertemporal hedging (long-run) demand for stocks in 20 growth-leading emerging market economies during the 1999–2012 period. We consider two types of investors: a domestic investor who invests in emerging-market assets only (with returns in local currency) and an international investor who invests in both US and emerging-market assets (with returns in US dollars). We establish economically relevant short-run and long-run demand for stocks in several emerging market economies, for both domestic and international investors. From a welfare perspective, however, the myopic demand for emerging-market stocks is much more important than the hedging demand. Further international diversification and foreign currency hedging by the international investor do not alter this conclusion. Hence, for both domestic and international investors emerging-market stocks are mainly assets for the short run.