History Favours Turn For Global Equities
Signs of better performance for global equities are ahead after a tough decade
. If history repeats, they are due to outperform some other asset classes in the medium term.
Having underperformed other listed asset classes in the past 10 years, and only matching the cash return over 20 years, the question now is Will the next decade be the period for international equities? If history repeats itself, then The time is nigh when they will outperform some other asset classes in the medium term.
The drop in May in the value of the Aussie dollar, indications that the economy of the USA is strengthening, and the continuing growth in emerging economies helps to build the case. However, the money and debt problems in the UK, USA and Europe are significant risks for global shares.
The past decade was difficult for international equities. In the decade up until 31 December 2009 they were losing 3.6 per cent annually (before tax, after costs) according to the 2010 ASX Long-Term Investing Report.
During that time Australian shares gave an annual return of 9.7 per cent. Looking over a twenty year period, international shares matched the annual cash return of 4.8 per cent.
But why have global shares been under performing? The main reason (for Australian investors with unhedged international investments) was the strong Australian dollar, which was rising against the US dollar. The higher Australian dollar offset gains in US equities from the March 2009 bear market lows. Like other investments that are unhedged against currency movements, returns from iShares exchanged traded funds (ETFs) were generally dampened by the rising Australian dollar. The average annual return from the iShares S&P 500 (in Australian-dollar terms) was slightly negative over five years.
Going against the trend: Emerging markets
It's easy to make sweeping generalisations though, and looking at headline performance figures for global shares can lend itself to that, or to missing some important factors. First, not all global shares' underperformed. The iShares MSCI Emerging Markets returned 11.7 per cent annually over five years and the iShares FTSE/Xinhua China 25 gained 15.75 per cent annually (in Australian-dollar terms). Australian investors who used iShares exchange traded funds to get exposure to emerging markets at the March 2009 bear market low had strong gains last year.
History favours better performance from global shares this decade. The MSCI World ex-Australia Index returned 13.6 per cent annually between 1990 and 1999, compared to 11.6 per cent for the S&P/ASX 300 index. Morningstar Australasia data shows that international equities were the top-performing asset class (among listed assets and cash) in 1995, 1997 and 1998 but the worst-performing in four of 10 years since 2000, with the MSCI World ex-Australia Index posting a negative 3.6 per cent annual return between 2000 and 2009.
"We know that last decade's experience (for all asset classes) is unlikely to be repeated in the next decade," says Tim Murphy, Morningstar Australasia's co-head of managed fund research. "In the short-term, momentum can drive returns in the same asset class for several years. But in the long term, such short-term patterns rarely persist." He says the main reason to invest in international equities because of the defensive qualities of global shares for Australian investors who invest in unhedged investments.
Do not read this as a recommendation to buy international equities. Do further research or talk to your financial advisers.
History Favours Turn For Global Equities
By: Hugh McInnes
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