There is nothing systematic about global stock markets
The only almost-systematic thing about stock markets, globally, is how random they are.
Predicting what future returns might be when compared to the past is hugely hampered by the fact that, frankly, global equity returns can be all over the place in terms of which country will perform the best in any particular year.
The evidence is clear
In an exercise that underlines our point, our friends at Dimensional Fund Advisers collated data on annual equity returns of developed markets from 2002 through to 2021:
Equity Returns of Developed Markets
Annual Return (GBP, %)
Past performance is not a guarantee of future results.
Source: MSCI developed markets country indices (net dividends). MSCI data © MSCI 2022, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
As you can see from the above, it’s very difficult indeed to predict future returns by looking at past performance by country, as it so very random. Each colour represents one of 22 developed markets, with the columns sorted top down, from the highest to lowest performing country each year.
A good – and easy to find – example here is New Zealand; go top left to see that it was the highest performing country in 2002. Move your eyes bottom right– New Zealand was the lowest performing country of 2021. And if you scan the scattered colours of the table with a focus on the beige shade that represents NZ, you’ll see that it floats all over the low to high hierarchy across this nineteen year period.
So, if randomness is the name of the game, what’s an investor to do?
Be diverse
Investment opportunities exist all over the world, and having a globally diverse investment portfolio is the key to capturing a wide range of returns and delivering more consistent outcomes over time.
It’s difficult to understand where next year’s highest returns will come from, so holding equities in multiple global markets makes great investment sense.
Higher returns in one market, one year, will help offset potentially lower returns in another market, the same year.
And, so, the canny investor embraces the randomness of global stock returns and covers the bases to deliver more consistent returns as part of a long-term investment strategy.