Will China Do Well This Year? What About The US? Here's Why it Doesn't Matter.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Investors Should Not Rely On News or Current Events to Predict Market Returns
Investment opportunities exist all around the globe, but the randomness of global stock returns make it exceedingly difficult to figure out exactly which markets will end up being the out-performers. In fact, purported positive news for countries do not always correlate to good investment performance.
For instance in early Dec 2022, China abandoned key parts of its zero-COVID strategy, opening up the path to normality after years of strict lockdowns. Financial institutions, strategists and commentators have jumped on the bandwagon promoting Chinese investments and the theme of the “reopening trade” to investors. So, did it all pan out? The Shanghai Composite Index tracks all the listed A and B shares in China; its performance is shown in the chart below. It responded to the news with a +1.47% gain. You might think, ‘Well, that’s pretty decent!’.
However, in investing, you have to consider the opportunity cost. The global stock market (represented by the ACWI Index below) did even better in the same time period, with a +5.7% gain. Wasn’t Chinese stocks supposed to do better — following that they finally have the ability to restart businesses and make profits again? So what gives?
Investors should remember that it’s challenging, and close to impossible, to predict a country’s returns by looking at the past or even the “latest” information, as shown by the performance of individual countries (see chart below). In the past 20 years, annual returns of the 22 developed markets varied widely from year to year. (Each color represents a different country, and each column is sorted top down, from the highest-performing country to the lowest.)
There are a few key points to note — a country can be a stellar out-performer in one year, and do extremely badly the next. For example, Austria was the best performer in 2017, but the worst in 2018. It muddled around in 2019 and 2020, and was the best again in 2021. What was the exact reason why it did so well, and then badly? We cannot ascertain or construct a strong argument for its performance pattern.
The chart for Emerging countries is quite similar. There isn’t a discernable pattern of consistent outperformance from any single country (see below). Given China’s demographics and its power on the world economic stage, it would be easy to assume that it would consistently hold a top spot in annual returns ranking. As you can see below, it is not the case. Would anyone in Singapore have staked their pot on Hungarian or Egyptian equities?
So rather than try to jump on a theme or tear your hair out over trying to decide where to put your money in, choose global and go diversified — just like what our first example showed. Investing in the world would likely reap you better returns than focusing on a single country (unless you were very lucky). Investing in this manner is less stressful and lowers the possibility of accidentally selecting the worst performer.
You stand to gain by understanding that you don’t need to predict which countries will deliver the best returns during the next quarter, next year, or even the next five years. Holding equities from markets around the world — as opposed to those of a few countries, or just a single one — gives you the ability to potentially capture higher returns where and when they appear; furthermore, outperformance in one market can help offset lower returns elsewhere. Put another way, a globally diversified portfolio can help provide more reliable outcomes over time.
If you are unsure of how or what to invest in this year - given the multitude of worries such as recession risks, inflation and rising rates, come and have a chat with us.
