Emerging markets have long held the mystique as being the planet’s future growth engine, and justifiably so given their favorable demographics, the forecasted rise of their collective middle class and the simple fact they are less mature than the developed world and thus have more room for upside potential. But investors who’ve bought into that story have been burned in recent years, which is why in a recent letter sent to GMO’s institutional clients, co-head of asset allocation Ben Inker examined whether emerging markets are a value trap.

“Is it any wonder investors are questioning why they allocate to emerging markets in the first place?” he wrote. “Even going beyond the woes of emerging, we are starting to hear some investors asking whether holding non-U.S. stocks is at all necessary.”

It’s not just that emerging-market equities have been a lousy investment for the past year (down 14.7% versus developed markets, as of September 30); they’ve been lousy during the past five years as they’ve trailed developed markets during that period by 12.2% (developed is a 50/50 split between the S&P 500 and MSCI EAFE).

As Inker pointed out, a dollar invested in the MSCI Emerging index has turned into $0.83 over that period, while a dollar invested in the MSCI EAFE index has grown to $1.21 and a dollar in the S&P 500 to $1.87.

Inker noted that market timing sentiments often are mistimed, but he acknowledges that to GMO’s thinking emerging markets did surprisingly bad, and U.S. markets did surprisingly well, during the past five years.

“Was that the luck of the draw, which has no bearing on future returns?” Inker asked. “Was it a temporary phenomenon that will soon reverse? Or does it tell us something important about emerging being a value trap and/or the U.S. being extraordinary that we need to take into account in our forecasting of the future?”

His short answer is that while emerging markets “deserved” some of recent run of bad luck/performance, which in turn helped the U.S. outperform, GMO doesn’t believe that emerging markets are a value trap, nor does it believe the U.S. has proved itself to be “particularly extraordinary.”

Indeed, U.S. stock market performance has been middling at best during the past 20 years, though it has been more impressive during the past 10- and five-year periods.

And the U.S. deserves some kudos for the recent performance of its equity market, which Inker says is due to “an impressive expansion of American profitability that has not been mirrored in the rest of the world.”

“This has, not surprisingly, led investors to try to convince themselves of the inherent superiority of U.S. stocks to justify continuing to hold them,” he wrote. “We cannot completely reject the possibility that those arguments are correct, but the evidence seems pretty thin. Certainly there is no strong evidence that would cause us to believe the U.S. is truly deserving of trading at a higher P/E than the rest of the world.”