March 09, 2010

What a difference a year makes

Exactly one year ago, it seemed like the financial world would fall into the abyss.  One trading session after the S&P 500 hit the eerie low of 666.79, the MSCI's all-country world stock index hit its low on March 9, 2009.  That painful day must still be fresh in everybody’s mind.  But since then, the world index is up about 73% and the S&P500 gained almost 70%.  The performance of the remaining major global stock indices since then has been equally impressive with returns ranging from 43% (China) to almost 110% (India) - see chart below.


Given these unusually high returns, it raises the question as to whether these types of returns can continue given rather difficult underlying economic conditions in most countries.  High unemployment rates in the US and in Europe, on average about 10%, put a damper on the all-important consumer spending.  Without a cash strapped US consumer for instance, it remains to be seen if companies can achieve the projected earnings at which current valuations are based upon.

Putting the above into perspective, the hoorays are not nearly as loud anymore.  We need to remember that current stock prices are still far below the levels of the pre-crisis highs which most of these indices reached in 2007 (India in Jan-08 Brazil in May-08).  Long-term investors are painfully aware of that when comparing their current net-worth with the amounts of 2007.  In terms of individual country performances, Brazil is nearly back to pre-crisis levels.  Others, in particular China, still have ways to catch up.


It remains to be seen whether global equities can continue generating double-digit returns in 2010.  But those are necessary for the majority of countries if stock prices are to go back to pre-crisis values anytime soon.  Both charts also remind us that portfolio diversification to mitigate a specific country risk is not easily achieved.  Although some countries performed slightly better than others, they all still went in the same direction during and after the crisis making international diversification rather questionable.

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