The
efficient markets hypothesis[i] has always been credible
in the sense that it is a tautology. We can take for granted that the market
reflects all publicly available information at any given point in time, even if
that doesn’t mean much on its own. After all, investors can interpret the same information
differently. A short-term profit warning could simultaneously represent an
important signal to one investor and noise to another.
Perhaps
the hypothesis has been so divisive over the past forty or so years for two
reasons: semantics and the existence of consistent excess returns. Regarding
its semantics, if the hypothesis had stated that the market reflects all trades
executed up to any point in time (admittedly, another tautology), nobody could
have argued. On the question of the existence of consistent excess returns, it
seems likely that the debate is unlikely to dissipate any time soon.
Continuous Excess Returns
It
is common practise to cite an extreme case (a statistical outlier) as evidence
to strengthen the credibility of an argument. In this vein, Warren Buffett is
most often provided as the example which disproves the efficient markets
hypothesis. Indeed, he himself once said, “if the market were efficient, I’d be
a beggar on the street with a tin cup.”[ii] (Even he is not averse to
reaching extreme conclusions).
On
the other side of the debate, over 40 years after putting forth the efficient
markets hypothesis, Eugene Fama is still adamant in his beliefs: “It (the
efficient markets hypothesis) is still definitely relevant for investors. There
are mountains of evidence showing that alternatives to efficient market-style
investing don’t do as well as passive investing…the message for investors has
never changed.”[iii]
Who
to believe? The views are not completely incompatible. Active investing is a
zero-sum game (as per Fama) but that doesn’t exclude the possibility of
outliers (such as Buffett). Both sides broadly agree that to enter the field of
investors who make consistent excess returns vis-à-vis the market benchmark
requires a highly specific skill set – probably beyond the vast majority of
investors.
If
the logic underlying the efficient markets hypothesis is true, developed
markets at least are probably becoming more efficient all the time. More
information is available more quickly than at any other time, service-oriented
firms are less volatile (thus, more predictable) and there are more (in theory)
better-informed investors. So what implications are there for the efficient
market hypothesis in the APAC region?
The APAC region
The
danger of discussing the relevance of the efficient markets hypothesis in a
specific economic area such as the APAC region is that we search for
differences that may not exist. Stock markets in this region have far more in
common with their western peers than investors sometimes wish to believe. The
challenge of “beating” the stock market is no easier in emerging economies.
The
specific case of Thailand illustrates the difficulties in trying to find these
elusive excess returns. In May 2013, the stock market reached an all-time high
of near 1650. Since then, with the country suffering from the aftermath of a
disputed election, the index has fallen to under 1300[iv]. At the time of writing,
most investors – acting in their own interests - know as much as each other
about when the dispute will be resolved.
The
efficient markets hypothesis is therefore as true (to whatever extent one
believes it is true) for the APAC region as it is for any other market:
consistent excess returns are extremely difficult to achieve. If this wasn’t
the case, it is safe to assume that Warren Buffett would have far more exposure
to stocks there or that an investor with a similar track record of success
might have appeared; neither has occurred.
Conclusion
Acronyms
and buzz-words represent dangerous territory for investors. Over different
periods in the past 15 years, their presence has drawn investors in search of
quick, painless returns. BRIC[v], “the next 11”[vi] (referred to – it seems
without irony – as N11), TIP[vii] and MINT[viii] spring to mind. If
nothing else, the acronyms provide useful reference points for fund managers
looking to sell emerging market funds.
Unfortunately
for investors, even if a group of markets (such as APAC) are fashionable enough
to merit an acronym, the efficient markets hypothesis applies as much to them
as it does in markets that aren’t à-la
mode. That is to say, an investor may find a ten dollar note on the street
in Manila or Kuala Lumpur but what makes it any more likely that they would
find it there rather than Wall Street?
The
APAC region offers opportunities to western investors looking to diversify. They
can benefit from different risk-return profiles and sometimes lower correlation to developed markets. However, achieving
higher returns than the benchmark requires more relevant information than other
investors in the market – an unlikely prospect in an investor’s own market, let
alone less familiar markets in the APAC region. The efficient markets
hypothesis isn’t perfect but it is highly credible.
[i] Up
to and including the semi-strong EMH.
[ii]
Forbes Magazine, April 3, 1995.
[iii] http://video.ft.com/1628728294001/Defending-efficient-markets/Markets
[iv] http://www.bloomberg.com/quote/SET:IND/chart
[v] http://www.content.gs.com/japan/ideas/brics/building-better-pdf.pdf
[vi] http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/brics-book/brics-chap-13.pdf
[vii]
Origin of acronym unknown.
[viii]
http://www.businessinsider.com/jim-oneill-presents-the-mint-economies-2013-11
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