After a challenging 2020, vaccine optimism has shown many financial analysts we follow a light at the end of the tunnel—and they have raised their economic and equity market forecasts accordingly. Many now envision an increasingly bright future, seeing the strong equity market returns over the past 12 months as only the beginning to a big, long-lived upturn—underpinned by a robust economic recovery. Fisher Investments UK agrees in one respect: Optimism about 2021 is warranted today. But we think maintaining rational market-return expectations is critical—especially if sentiment warms further and evolves into full-fledged euphoria, which can lead investors to take on excess risk that may not match their personal goals or needs.
When financial commentary hypes big forecasts and strong returns in high-flying companies, broad market-like returns may look boring and insufficient—especially if equities have only an average year or thereabouts. That can lead investors to veer from a diversified portfolio and chase heat in narrow categories and concentrated positions in individual companies. However, if those areas don’t perform as hoped, the result could be a big setback for investors. Instead of chasing hot performance, we think it is most helpful to target broad market-like returns, which have historically delivered the long-term growth we think many retirement investors need to reach their goals. To stay disciplined, Fisher Investments UK thinks it helps to understand what market-like returns actually entail.
In our view, when assessing the market, it is best to use a broad global equity index like the MSCI World, which covers 23 developed-world nations. Its long-term annualised return is 10.2.[i] In other words, that is the annual rate of return, compounded over time, that would lead to the index’s cumulative return since inception. However, this doesn’t mean global equity markets will provide this return year in, year out—or even land close to it in most years. That long-term average encompasses a wide range of calendar-year returns, from -30.6 in 1990 to 54.1% in 1975.[ii] It includes years in both long periods of generally rising equities (bull markets) and extended, fundamentally driven downturns of -20% or more (bear markets). Also consider: Since 1970, there have been 13 years of negative returns, 10 years of returns between 5% and 15% and 25 years of returns greater than 15%.[iii] Said another way, average years don’t occur the majority of the time.
We think it is important for investors to expect year-to-year variance—even during long periods of generally rising share prices. For example, the 2009–2020 global bull market wasn’t a smooth climb—two years produced negative returns.[iv] Yet lean years didn’t prevent big, positive years from occurring. After a mildly negative 2018, global equities soared 22.7% in 2019.[v] Staying disciplined through mild stretches would have allowed investors to benefit when the strong stretches arrived. Participating fully in bull markets is critical to reaping global equities’ long-term returns, in our view.
Again, all of the above is based on global market returns. We think that is especially important to keep in mind for European investors, as individual European nations’ equity returns can deviate wildly from global returns in any given year. Countries and even broader geographical regions may not have significant exposure to certain equity market sectors—or may have a large weighting to others. For example, eurozone equity markets tilt towards value-orientated shares—companies that tend to be more sensitive to economic changes and return more of their profits to shareholders via dividends and share buybacks—which are often concentrated in certain sectors, including Financials and Industrials. However, eurozone equity markets have a relatively lighter weighting in Tech and Tech-like companies: The Information Technology sector comprises 12.6% of the MSCI EMU (Economic and Monetary Union) compared to its 21.3% share of the MSCI World.[vi] Moreover, in some countries, a single company can dominate the domestic equity market. For example, one pharmaceuticals firm makes up 31.8% of the MSCI Denmark whilst a single brewer comprises 31.3% of the MSCI Belgium.[vii]
That can set up tricky situations for investors who own global portfolios but compare their returns to their home country’s benchmark index. For example, in 2012, the MSCI World’s 14.0% in euros trailed the BEL 20’s 24.2% return—probably disappointing a Belgian investor with a global portfolio using Belgium’s benchmark index as their performance comparison.[viii] Last year, Denmark’s OMX Copenhagen 20 soared 31.0% in kroner, vastly outpacing the MSCI World’s 6.0%.[ix] That big gap would likely have been frustrating for a Danish investor with a global portfolio who used the OMX Copenhagen 20 as their equity index performance reference.
But these examples don’t mean a global investor had a bad year. The comparisons aren’t equivalent, as an individual country’s benchmark equity index won’t necessarily have the same sector weightings of a global equity index—let alone the same number of constituents. Of the OMX Copenhagen 20’s 20 constituents, 8 are Health Care firms (40%) and 4 are Industrials companies (20%).[x] The MSCI World Index has over 1,580 constituents—of which 12.3% are in Health Care and 10.1% are in Industrials.[xi] If the OMX Copenhagen 20’s individual constituents—particularly in Health Care—do well, that will likely buoy the index’s returns. But if they struggle, that will weigh on the OMX Copenhagen 20’s returns.
This type of divergence isn’t solely an individual country phenomenon. It can happen at a regional level, too. Eurozone equities’ value tilt likely contributed to underperforming global equities in 2020, as growth-orientated shares (companies that tend to focus on growing their earnings and revenues over time and typically trade at relatively higher prices compared to expectations for the company’s future earnings) led last year.[xii] Recognising the impact of sector weightings—or even individual companies—on index returns can help investors identify what is and isn’t reasonable in terms of global market-like returns.
Reasonable expectations can help instil investors with the discipline necessary to reap market-like returns. It isn’t irrational to think the equity portion of your portfolio’s longer-term return should be near equities’ historical annualised average. The journey there, though, will have twists and turns galore. Today, investors’ challenge is to refrain from giving in to greed and taking big swings in an attempt to attain big returns. Targeting global market-like returns may not be as flashy, but in our experience, it is a more sustainable path to achieving long-term investing success.
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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] Source: FactSet, as of 11/03/2021. Statement based on MSCI World Index annualised return with net dividends in GBP, 31/12/1970–31/12/2020.
[ii] Ibid. MSCI World Index annual return with net dividend in GBP, 1970–2020.
[iii] Ibid. Statement based on MSCI World Index annual returns with net dividends in GBP, 1970–2020.
[iv] Ibid. Statement based on MSCI World Index annual returns with net dividends in GBP, 2011 and 2018.
[v] Ibid. MSCI World Index return with net dividends in GBP, 31/12/2018–31/12/2019.
[vi] Ibid. Sector composition of MSCI World Index and MSCI Economic and Monetary Union Index, as of 16/03/2021.
[vii] Ibid. Statement based on MSCI Denmark and MSCI Belgium constituents, as of 11/03/2021.
[viii] Ibid. MSCI World Index return with net dividends and BEL 20 Index gross return, 31/12/2011–31/12/2012. Presented in euro to avoid impact of currency fluctuations. Currency fluctuations between the euro and pound may result in higher or lower investment returns.
[ix] Ibid. MSCI World Index return with net dividends and OMX Copenhagen 20 Index gross return, 31/12/2019–31/12/2020. Presented in DKK to avoid impact of currency fluctuations. Currency fluctuations between the DKK and pound may result in higher or lower investment returns.
[x] Source: Yahoo! Finance, as of 17/03/2021. Components of “OMX Copenhagen 20.” https://finance.yahoo.com/quote/%5EOMXC20/components?p=%5EOMXC20
[xi] Source: FactSet, as of 16/03/2021.
[xii] Ibid. Statement based on MSCI World Index, MSCI EMU Index, MSCI World Growth Index and MSCI World Value Index returns with net dividends, in GBP, 31/12/2019–31/12/2020.
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