Many Happy Returns


by Jim Parker, Vice President of Dimensional Fund Advisors

The holiday season encourages media retrospectives about financial markets. It’s fun to match these up with what people were saying a year before.

In December 2011, Barron’s told investors to “buckle up.” The consensus prediction of its panel of ten stock market strategists and investment managers was for the S&P 500 to end 2012 some 11.5% higher, at about 1,360.1

“That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway,” the writer said. “Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past.”

There was so much for forecasters to get right—the negotiation of the euro zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election, and the challenge for emerging economies to sustain high economic growth rates.

Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high, and a number of countries that use the euro are unable to pay their debts. The US presidential election gave way to worries over the “fiscal cliff,” while Chinese exports have been hit by the slowdown elsewhere.

In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron’s panel forecast of the S&P 500 reaching 1,360, which the magazine said was ambitious, now looks conservative. The index was 4% above that level by mid-December. What’s more, some of the strongest performances have been in emerging and frontier markets.

The table below shows performances for 2012 (through November 30) and annualized returns for the past three years for twenty developed and twenty emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in US dollars.


Developed Markets (USD)
Country YTD 3YR
Belgium 36.8% 6.7%
Denmark 28.1% 10.9%
Singapore 27.1% 10.4%
Hong Kong 27.1% 10.3%
New Zealand 26.8% 14.7%
Germany 25.8% 4.2%
Austria 19.0% -7.8%
Switzerland 18.8% 8.0%
Australia 18.6% 7.1%
Netherlands 17.4% 2.9%
France 17.1% -1.5%
Sweden 17.0% 9.2%
Norway 16.8% 7.0%
United States 14.3% 10.7%
United Kingdom 12.9% 7.1%
Finland 9.7% -6.0%
Italy 8.6% -10.5%
Canada 7.4% 5.2%
Japan 2.7% 0.8%
Greece 2.0% -42.5%
Emerging Markets (USD)
Country YTD 3YR
Turkey 53.6% 12.8%
Philippines 42.4% 24.8%
Egypt 36.0% -4.5%
Pakistan 28.9% 13.3%
Poland 28.3% 0.3%
Thailand 26.8% 27.3%
Hungary 26.7% -9.1%
Colombia 26.1% 21.0%
India 26.0% -0.3%
Mexico 24.0% 12.6%
China 17.1% 0.1%
Taiwan 15.6% 6.6%
Korea 15.3% 11.7%
Peru 13.4% 8.5%
Malaysia 9.8% 14.9%
South Africa 7.9% 9.2%
Russia 7.1% 1.9%
Chile 3.3% 8.8%
Indonesia 2.9% 15.6%
Jordan -1.7% -9.0%

Source: MSCI country indices through November 30, 2012.

Among developed markets, three members of the seventeen-nation euro zone—Belgium, Germany, and Austria—were among the top ten best-performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.

While not one of the top performers, the US market still delivered positive returns in what many observers judged as a highly uncertain economic and political climate.

And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India, and China, the real stars in the emerging market space the past three years have been the Southeast Asian markets of the Philippines, Thailand, and Indonesia.

There are a few lessons here. First, while the ongoing news headlines can be worrying for many people, it’s important to remember that markets are forward-looking and absorb information very quickly. By the time you read about it in the newspaper, the markets have usually gone on to worrying about something else.

Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from the information that the market has already priced in.

Third, if you are going to invest via forecasts, you need to realize that it is not just about predicting what will happen around the globe, but it is also about predicting correctly how markets will react to those events. That’s a tough challenge for the best of us.

Fourth, you can see there is variation in the market performance of different countries. That’s not surprising given the differences in each market in sectoral composition, economic influences, and market dynamics. That variation provides the rationale for diversification—spreading your risk to smooth the performance of your portfolio.

So it’s fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It’s far better to let the market do the worrying for you and diversify around risks you are willing to take.

In the meantime, many happy returns!

1. Vito J. Racanelli, “Buckle Up,” Barron’s, December 19, 2011.