Efficient market hypothesis and different performances between countries

Question

When comparing historical gains (I used the "adjusted close" data on yahoo) of major indices in different countries it is clear that the US outperformed most of these by quite a bit (see for example also https://www.visualcapitalist.com/worlds-major-stock-markets-same-scale-1990-2019/). From US based sources you often read that the expected average yearly return on investments is around 10%. This figure is based on historical data of for example the Dow Jones Index. However, other major indices had much lower performances (on the extreme end: the Nikkei 225 had basically no gain in the last 30 years).

Is this just a matter of the US having been the (unpredictable) "winner" over the last 100 years (or decade or most time intervals in between)? Just like having picked Apple around 2005 would have been very lucky. If so any prediction on the new average return on investments should clearly not be based just on this "winner" from previous years right? Would it not be more accurate to base the estimate for the average expected return on more (all) markets?

Or does the US predictably outperform other markets for some reason? That would beg the question why all markets are not emptying out and pouring their money into american stocks.

Is there some tax, regulatory, currency or inflation related reason that a consistent predictable gap in the average gain between US markets and other markets would not close?

Answer 1

Efficient market hypothesis does not in itself predict that stock market returns will equalize among different stock markets so it should not really be part of the question (efficient market hypothesis only refers to informational efficiency of markets). Rather this is something that would be predicted by trade/international macro models that predict factor return equalization (i.e. Rybczynski, Stolper-Samuelson, and factor-price equalization theorems).

These theories would predict equalization of expected returns to capital due to capital flows between countries. If a country's stock market performs better than some other country capital should flow from the worse performing country to the better performing country until supply and demand for capital equalizes expected returns.

However, in real life expected returns wont always be equal even if they will exhibit tendency to equalize. As you mentioned in your question this can be due to various institutional reasons (Schularick, & Steger, 2008), but it can also be due to imperfect capital mobility, due to market failures, some investments might be geographically specific and so on. The literature on this is extremely broad I suggest looking for keyword factor price equalization on google scholar.

Furthermore, note that link you provided from that site just shows nominal ex post observed returns from stock markets between different countries. That in itself does not actually provide any evidence that ex ante expected returns are not equal between those countries.