In a year when they have been spooked by stories of another Lehman-like bust, when danger looms all around, when gale-force winds buffet the markets, to whom do investors scurry? The safe arms of Uncle Sam, of course.
The US debt may be downgraded, the country’s unemployment rate may remain elevated, its growth may be disappointing and its politics may be dysfunctional, but it’s still the world’s only safe haven. That’s seen not only from the falling yields on US treasuries—the 10-year treasury yield has fallen to 1.96% from 2.86% a year ago—but also from the performance of its stock markets. In the last year, the MSCI index of US equities has fallen a mere 3.35%. Not bad at all in a year full of alarums and excursions. Emerging markets, on the other hand, are strictly fair-weather destinations with MSCI China, down 25% in the past one year in US dollar terms, or MSCI India, lower by 30.76%. The higher growth rates in emerging markets have been of no avail.
The Indian market, in particular, has been smashed by rupee depreciation and its fall in dollar terms is more than that of Eurosclerotic economies such as Italy, down 28.78%, or Portugal—downgraded to junk—down 28%. We can console ourselves that we’ve beaten Greece, though—MSCI Greece fell 65.6%, after plunging 51.5% in the preceding 12 months.
Investors also have a soft spot for “Old Blighty”, with MSCI UK down a relatively respectable 10.95% in the past year. They must have been reassured by a member of the Bank of England’s monetary policy panel saying it’ll take five-and-a-half years for England’s economy to recover to pre-recession levels.
Did US equities do comparatively well because they performed badly earlier? Well, MSCI US was up 8.4% in the 12 months to 25 November 2010, not much lower than MSCI emerging markets’ gain of 12.3%. MSCI India, incidentally, was up 12.4% during that time.
But if we take the preceding period—25 November 2008 to 25 November 2009—MSCI India was up a glorious 126%, MSCI China 93% and MSCI EM 95.5%. In contrast, MSCI US was up 30.6%. Greek markets, incidentally, moved up 45% that year. We are, as they say, a high beta market. Perhaps, emerging markets are still reeling from the after-effects of that extraordinary sprint in 2009? Perhaps, they are conserving their energies for another gallop when the storm clouds dissipate?
Another asset class that investors have liked in the past year has been commodities, in spite of nagging worries of growth. The Reuters/Jefferies CRB Commodity index is up 1.03% in the past year, boosted by the resilience of crude oil prices. Brent crude prices are up 23.6% compared with a year ago, beating gold, up 22.5% in dollars. Given the global weakness, that should change.