Since the start of this year global equity markets have returned 11% compared to a virtually flat return from government bonds, while lower quality debt issued by companies has returned 21% since January – more than twice the return on top-rated corporate bonds.
“Underlying this year’s rally in risk assets seems to be a belief that policymakers will, eventually, do what it takes to sort out the euro crisis,” Stewart explains, “It is striking that the big bounce in equities kicked off in June after the EU announced its bailout of Spanish banks.”
Taken over a longer timeframe, however, low-risk assets such as bonds have been the big beneficiaries of the uncertainty and economic weakness. Since 2007 US government bonds have given a 40% return against a 15% return on US equities.
Other “safe assets” have also benefited from the uncertainty of recent years, Stewart continued, as a UK investor who bought yen in 2007 would have made a return of 87%, while gold has yielded a return of 158% over the past five years making it the best-performing major asset class over that time period.
“Yet what stands out is how quickly market views change. Witness the poor performance of gold this year or the seesaw performance of emerging market equities: down 54% in 2008, up over 100% in 2009-10, down 19% last year. As retail investors are often reminded, past investment performance provides no guide to future performance,” Stewart concluded.
