A reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term.
To the average investor, 2020 was nothing short of confusing. While the global economy was devastated by the pandemic, stock markets rallied. The US S&P 500 index reached record highs as investors flocked to growth and technology stocks. Aided by exceptionally low-interest rates, government fiscal injections and rapid-fire vaccine development, most share markets recovered from the first quarter collapse to end the year in the black.
However, not all asset classes delivered the goods, as highlighted by Mercer’s ‘Periodic Table’ (the Table) of investment returns. Produced annually, the Table colour-codes 17 major asset classes and ranks how each performed on an annual basis over the last ten years.
A quick glance at the Table shows how one year’s winners can quickly become next year’s losers and vice versa. Predicting what may happen next poses a big challenge to even the most avid market followers.
Looking across 2020 and the past decade, several observations can be made from the Table:
It’s expected that global economies will continue to recover as government subsidies and central bank policies continue to provide liquidity and accommodate economic growth. The rate of growth however will vary by country depending on the emergence from COVID-19 restrictions and the successful roll out of vaccination programmes. The uncertainties of Brexit and the US elections from 2020 have faded, however global trade tensions remain between the US and China despite the change in administration in the US. Likewise, trade tensions between China and Australia remain as China continues to impose trade restrictions on Australian-sourced imports. However, Australia is benefitting from booming iron ore and other commodity prices as the global economy recovers.
Although international shares look expensive, low-interest rates and further fiscal stimulus around the world are likely to support P/E levels with a recovery in earnings and dividends yields as the global economy continues to rebound. With few asset classes standing out as obviously ‘cheap’ at present, the argument for wider diversification is perhaps as strong as ever. Exposure to non-traditional asset classes can serve to balance out the path of returns over time, so long as the risks are understood and access is attained on a cost-effective basis, as bonds are not offering much income in a “lower for longer” yield environment, and equity is more richly valued.
In sum, one can while away the hours making additional observations on the Table, and perhaps identify patterns. But are they real or illusory? The unpredictable nature of capital markets is unavoidable. The Table serves as a reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term. In that way, there is a greater chance that periods of market disruption, such as we saw in 2020, can be tolerated rather than spark a panic reaction.
It is well established that the majority of return variation comes from asset allocation rather than the timing of individual markets or securities. Mercer believes that during episodes of heightened volatility investors should try stay the course, focus on the long-term time horizon and use robust and stress tested portfolios.
This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.