Trailing 12-month Stock Returns Turn Positive
For the First Time since Mid-2008
It’s been a busy year for investors, commentators, politicians…everyone. But after an historic crash and an equally historic rebound, things at least seem like they might be “returning to normalcy” in the world’s stock markets…
That’s because, for the first time in more than a year, trailing 12-month stock market returns for a dozen emerging markets are now in positive territory while many major indexes are slightly down since September 2008.
By March 9th the MSCI World Index and the S&P 500 Index hit levels not seen in over a decade. The MSCI Emerging Markets Index bottomed in November 2008, and has since gained almost 120% from its multi-year low.
To be fair, the MSCI Emerging Markets Index is leading the pack – up 19.7% over the last 12 months. The BRICs – or Brazil, Russia, India and China – have surged 24% since September last year.
The emerging markets are the only broad global stock market category to log a positive ten-year total return, according to data from MSCI/Barra.
Since 1999, the MSCI Emerging Markets Index has risen 8.6% per annum compared to a loss of 0.90% annualized for the MSCI World Index.
The major markets – which were badly hammered over the last 24 months – are now down just 6% as a group since September 2008, based on the MSCI World Index.
Indeed, the global financial crisis was triggered by the G-10, namely the United States and Western European economies. But despite originating the crisis, advanced economy bourses have now climbed to their highest levels since before the Lehman Brothers’ collapse on September 15, 2008 and continue to power ahead this fall.
Still, a hypothetical $100 invested in the MSCI World Index in January 2008 would now be worth just $72 – despite the big rally since March. The MSCI Emerging Markets Index would now be worth $87 – also a cumulative loss though less than major markets over the same period.
But What About 2009-2010?
Looking ahead and judging by historical trends, the emerging markets are likely to lag the major markets – at least over the short-term. The same pattern occurred in the late 1980s and early 1990s, when emerging markets went through the roof and investors shoved billions into the sector. By late 1994, the Mexicans devalued the peso and the region went into a tailspin culminating with the Asian financial crisis in 1997-1998.
If history is any guide then the major markets crisis of 2007-2009 might provide the framework for bigger gains over the near-term. However, both advanced and emerging market equities are no longer cheap at this point.
Emerging markets undoubtedly provide superior long-term returns as the center of wealth continues to gravitate to countries like China and Brazil. Yet the great story for this asset class is already baked into prices with regional currencies surging this decade, stock prices no longer a bargain and credit spreads approaching their tightest levels on record. We’ve seen this story before.
Alternatively, maybe stocks will continue to disappoint. Bill Gross of PIMCO, the world’s biggest bond fund complex, recently purchased billions worth of Treasury bonds this month as he makes a bet economic growth will stall in 2010.
So is it stocks or bonds for the long haul? Since 1969, history says bonds.
Sincerely,
Eric Roseman
Investment Director