It is very easy, almost human nature, to extrapolate to the future the most recent experience, whether good or bad. Good times will never end and bad times seem endless, when they occur to us. In the same manner, investors tend to extrapolate the most recent past performance to the future, and "stick with the winners". For a significant period of time, this is a very good strategy to follow. Until it isn't anymore and usually one realizes that after several years. During the last 10 years, US equities were the place to be. Their dominance over other regions is considerable during this period, primarily boosted by the explosion of growth in the Technology sector and the innovation in that space. But has it always been like this ? And is it safe to assume that US equities will continue to perform better in the next 10 years as well ? History shows that every 10 or 20 years there is a singnificant change in leadership.
1980 - 1990: Japan's dominance
The Japanese manufacturing miracle of the 80s brought the Japanese Nikkei Index (in green) to produce almost double the returns of the S&P500 (blue line) in that decade. Most of the outperformance, however came in the last 3 years of the decade, as more and more investors were lured into the theme, not believing at first the story. And then Nikkei crashed.
1990-2000: No other place to be rather than Emerging Markets
Emerging Markets in the 90s, produced a whopping 1800% total return (green line) vs "just" 370% in the same period for the S&P500 (blue line). Again, most of this outperformance came in the first 4-5 years of the decade, when investors played this theme. The 1997 and 1998 crises in Asia and Russia put a temporary stop to this outperformance.
2000-2010: Emerging Markets continue to be the "place to be"
Although the markets were falling in sync during the first three years of the decade, after the 2000 bubble burst in the US, Emerging Markets (green line) took off again and produced 4-5 years of extraordinary excess returns vs the US market (blue line). The 2008 Lehman Brothers crisis put a temporary stop to this but in late 2009, the theme of investing in Emerging Markets brought in the "last investors who had missed the train" in the previous 10-20 years. Those were burned the most in the next few years.
2010-2020 : US markets finally outperform the world
As Europe was entering a dark period and Emerging Markets (green line) were suffering from the hangover of the 1990-2010 party, the US (blue line) emerged as the primary beneficiary of capital flows. The emergence of amazing technologies and innovation drove investors to ever increasingly willing to participate in those companies' growth.
What will the 2020-2030 period finally bring ? Will the US equities continue to dominate for one more decade, taking revenge from the 20-year outperformance of Emerging Markets ? Could another region (China ?) turn out to be the best investment of the new decade ? Is Japan ready for a come back, after 30 years in the shadow ? It is hard to mention Europe as a winner, given the fragmentation of the region, but there are indeed amazing companies of global reach in our territory, too. These questions will be answered in 2031. Until then, the lesson to be learned is to have a portfolio with a diverse allocation to the various regions (USA, Emerging Markets, Japan, Europe) and not "bet" primarily on the most recent winner. Things change. It takes a lot of time to realize it, but they do.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
Sources of the charts : Factset