January always kicks off with a burst of optimism: attendance soars at gyms and fitness centers and cigarette sales plummet. We really do make noble New Year’s resolutions but come February this seasonal effect sadly vanishes.
Another favorite pastime in early January is reviewing the previous 365 days. The media fills with thoughtful appraisals of the year that was and we also cannot resist this tradition. You will find in the accompanying a review of clients’ questions, and our answers, published in UBS investor’s guide in 2009. We assess our answers now, remembering that hindsight is always 20-20.
This New Year adds a twist because we also can take stock of an entire decade. It’s still unclear how this period will be labeled in the future—the 2000s, the Noughties, the Aughts or even the Naughty Aughties have all been proposed. But there is emerging consensus on one point, at least among the punditocracy: the past ten years have already been judged a lost decade.
For example, in a recent column in The New York Times entitled "The Big Zero," Nobel Prize-winning economist Paul Krugman was quite unconditional, writing, "It was a decade in which nothing good happened." The facts appear persuasive: by the end of 2009, US private-sector employment was at the same level as in 1999 and, adjusted for inflation, median US household income was significantly lower, as were US house prices.
Looking at financial markets, equities in developed countries declined over the past decade. In local currency terms, the MSCI World free total return index, which aggregates all developed stock markets, declined from 518 to 514. In US dollars, it increased slightly, by 0.2% per year, but this more reflects the dollar’s weakness than market strength, we would argue.
The decade clearly had its losers, but can we really say it was lost? We don’t dispute that some economic trends and financial markets had a rather dismal time. But there are at least two caveats to apply before delivering a verdict on the decade past: Let’s not be too Western- or even US-centric, and also not too equity-centric.
While the US and many other developed countries did indeed languish, it was the Roaring Noughties for most of the emerging markets. From an economic perspective, China is poised to become the world’s second-largest economy in 2010. And from an equity perspective, the average yearly stock market returns from Brazil (+14.1%), Russia (+15.6%), India (+14.1%) and even China (+11%) simply dwarf those of any developed stock market for the decade.
This robust activity obviously had consequences for other asset classes, like commodities. Both gold and oil had their best ten-year runs since the 1970s. But even bond investors had a rather decent decade. At the beginning of 2010, the emerging market theme shows no sign of running out of steam, as these economies lead the current recovery.
But in the spirit of New Year’s cheer, we can also share some optimism for developed equities. Although we don’t have many precedents for study, so far no lost decade was followed by another.
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