Friday, November 21, 2008

Eight years recap


For those who need a recap on what has happened in the investment world for the past 108 years, The Global Investment Returns Yearbook (GIRY), compiled by London Business School experts is definitely an eye opener. The core of the Yearbook is provided by a long-run study since 1900 in all the main asset categories in Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States. These markets today make up some 85% of world equity market capitalisation. The first chapter of the book gave us an insight of the global markets from the first eight years of this decade.
The key findings for year 2007:

- Despite the turmoil in the credit markets, stock markets performed reasonably well in most countries. Emerging markets did best.
- Volatility accelerated from a low base at the start of 2007.
- Sector exposures had a larger impact than in recent years, with resource stocks doing particularly well, and financials suffering.
- The tide turned for small-caps, which suffered a reversal after four years of outperformance. Value stocks also disappointed, and they underperformed growth stocks.
- While the US (and world) bond indices did well, most government bond markets gave a negative real return.
- Commodities, notably oil, generally performed well.
- The second half of 2007 witnessed a real estate slowdown in many countries, and a sharp collapse in the US.
- Currency mattered. The US dollar was again weak, and nearly all currencies were performance enhancing. Most countries had satisfactory USD returns, but their Euro returns were markedly lower.
- By end-2007 stock markets had largely eliminated the losses from the savage, start-of-century bear market. This is remarkable since, at the trough in March 2003, US stocks had fallen 45%, UK equity prices had halved, and German stocks had fallen by two-thirds.
- Annualised real equity returns over 2000-07 remain negative in only three of the 17 Yearbook countries, the US (-0.4%), Japan (-0.7%) and The Netherlands (-1.3%). However, returns remain low in several other markets, including the UK (0.5%), Germany (1.4%), France (1.2%), Italy (0.9%) and Sweden (1.4%).
- The annualised USD real return on the GIRY world index over 2000–07 is just 1.3%. Over this period, bonds beat equities (and bills) in 10 out of 17 countries, including all the largest markets. Realised equity risk premium over this period remain low by historical standards.
- Despite 2007 being generally disappointing for small-caps, over 2000–07 they nevertheless beat large-caps in every Yearbook country except Norway (and, marginally, Taiwan). In most countries, those who invested in 2000 in small-caps are more than 50% richer than large-cap investors.
- The poor return in 2007 from value stocks did not eliminate the 2000-07 value premium. Over 2000-07, value stocks beat growth stocks in every Yearbook country except Hong Kong (and, marginally, Switzerland). In most markets, those who invested in 2000 in value stocks are more than 50% richer than growth-stock investors.
- Momentum trading has provided large potential profits in virtually every equity market. A strategy of buying stock market winners, while avoiding (or taking a short position in) stocks that have performed poorly, has provided a large premium since 2000-07.
- A major factor is the investor’s choice of reference currency. Over the eight years since 2000, the US dollar has fallen against all Yearbook currencies except two (the South African Rand and the Yen). Since 2002, the dollar has fallen against every Yearbook currency—by 39% in the case of the Euro.
- A huge gap has now opened up in sector performance since the tech-bubble burst in March 2000. An investment in the top performing UK sector—tobacco—would now be worth 212 times more than an equivalent amount invested in the worst performing sector—technology hardware.

No comments: