Jim Jubak

It's early. The results are open to revision and interpretation. And one month doesn't make an investable trend any more than a single swallow makes a spring.

But have you noticed? In the past month, emerging stock markets, such as China and Brazil, have outperformed the U.S. market.

And that's an absolute turnaround from results in 2010 and for most of 2011.

Does it mean that we're about to reverse the pattern that's held for more than a year and see emerging markets start to outperform developed markets? Well, sort of. The picture right now shows that the outperformance is limited to some emerging markets, and even in those markets, the outperformance is spotty.

But I think there's the beginning of a trend here that your portfolio needs to respect. And because it's so early, you need to pay attention to what kinds of stocks in these emerging markets investors are willing to buy right now.

By the numbers
Here is the data.

U.S. markets: For 2010, the Standard & Poor's 500 Index ($INX) was up 15.02 per cent. For 2011, as of Nov. 15, the S&P 500 was up 1.65 per cent. In the past three months, it gained 5.05 per cent. In the past month, 2.85 per cent.

Brazil: For 2010, the iShares MSCI Brazil Small Cap Index (EWZS) was up 7.69 per cent. For 2011, as of Nov. 15, it was down 19.54 per cent. In the past three months, the loss was a more modest 2.80 per cent. In the past month, the index climbed 4.35 per cent.

Yep. In the past month, the Brazil index beat the U.S. market. After trailing for 2010. After getting killed in 2011 to date. After trailing badly over the past three months.

China shows the same pattern — with some important wrinkles.

In 2010, the SPDR S&P China (GXC) was up 7.58%. For 2011, as of Nov. 15, it was down 11.31 per cent. For the past three months, the loss was 5.13 per cent. And in the past month, the index climbed 4.77 per cent.

In other words, exactly the same pattern as Brazil — well behind the U.S. market until the past month, and then outperformance. Significant outperformance. We're talking a 2.85 per cent gain for the U.S. index versus 4.35 per cent for Brazil and 4.77 per cent for China.

Bigger is better
One interesting wrinkle is that you could have done even better investing in China recently if you'd picked a different index. If, instead of the SPDR S&P China, with its 4.77 per cent gain in the past month, you had invested in the iShares FTSE China 25 Index (FXI), you would be looking at a nine per cent gain in the past month. (And a much lower 0.76 per cent loss over the past three months, too.)

What's made the big difference in the gains from the two indexes? Size, in my opinion.

The average stock in the very concentrated FTSE China 25 Index has a market capitalization — a total market price — of $72.6 billion, according to Morningstar. These are huge companies — and indeed, Morningstar categorized 92.4 per cent of the index holdings as "giant." (This isn't exactly a surprise; the mandate of the index is to invest in the 25 largest Chinese companies listed in Hong Kong.)

The average stock in the SPDR S&P China Index isn't a small cap by any means (although the index does include a 0.43 per cent weighting of small-cap stocks and even a 0.19 per cent weighting of microcaps). But the average holding is a smaller (if still very large) $27.7 billion. Only 61.2 per cent of holdings qualify as giant, according to Morningstar. The index even includes an 8.2 per cent weighting to stocks that qualify as midcap. (The index is a market-cap-weighted index of 130 stocks that trade in Hong Kong, or as U.S.-listed ADRs, or are listed on the New York Stock Exchange.)

There's isn't a similar big and bigger index pair for Brazil. But comparing the gains of the iShares MSCI Brazil Index with those of the iShares MSCI Brazil Index (EWZ) makes a similar point: Size matters very much right now.

In the month ended Nov. 15, the small-cap Brazilian index (the average market cap of its holdings is $776 million) showed a 2.28 per cent gain, compared with the 4.35 per cent gain for the iShares MSCI Brazil index (average market cap: $21 billion). Only 22.2 per cent of the latter index is made up of midcap companies, and a tiny 2.2 per cent consists of small-cap stocks.