Martyn Paterson: The randomness of global equity returns
Martyn Paterson, financial planner at AAB Wealth in Aberdeen, examines the unpredictability of the global equity market – and why it isn’t necessarily a bad thing for investors.
Where in the world will I invest? A question often asked and, given the current happenings in world markets, a very topical one. If you listen to the news, some countries may seem like better places to invest than others, based on how their economies and stock markets are doing at any particular time.
Across more than 40 countries, there are over 15,000 publicly traded companies. The prospect of working out where to invest leads many investors to simply plump for the place they know best – their home market. While there may be very good reasons to do so, by prioritising too much close to home could mean missing out on part of the investment universe.
The UK, for example, represents only 5% of the global equity market. A UK investor wishing to build a global equity portfolio may have cause for investing more in their home market, however this means reduced investment in other countries. The US equity market, by far the largest, only represents about half the global market.
Given the speed that equity markets process information from millions of buyers and sellers each day, investors can trust market prices to provide a real-time snapshot of global investment opportunities. No one needs to be an expert in every region to benefit.
Who would have predicted the best performing developed equity market in 2018… Finland! The worst… Austria, which, incidentally, was the best in 2017!
The same first-to-worst fate was also suffered by Denmark in 2015 and 2016 while New Zealand did the opposite in 2000 and 2001, going from worst-to-first!
Over the last two decades, the US, despite some very strong returns in recent years, only had the ninth best annualised return at 6.3%, while top of the shop was Denmark with annualised returns of 10.6%. It has to be noted that Denmark only represents 1.1% of the global market available to investors.
So where was the UK in all of this? Out of 22 developed markets over the last two decades, the UK’s highest position was fourth, in 2011, with a return of -1.8%, while its lowest was in 2003 with a return of 18.8%. How random is that? How can you predict future returns of a solitary market? No compelling research suggests investors can consistently outguess market prices and pick winning countries.
The evidence of these random returns is not actually bad news for investors though. Rather than trying to guess which country will outperform, a well-structured and diversified global portfolio can help capture returns from markets around the world, wherever and whenever they occur, and deliver more reliable outcomes over time. Following this approach will ultimately lead to a better investment experience over the long term.