Market Musings 010522:The Big Calls

Summary:

  • A few big asset allocation calls can make a huge difference to long-term portfolio performance
  • A few historical examples: 2011-21 Nasdaq, Chinese stocks 2003-07, government bonds 1980-2020, commodities 1999-2008
  • These long bull runs typically came after a long period of prior under-performance or falls in each case
  • A major catalyst was also required to turn around this under-performance a realise underlying value
  • Candidates for such a “Big Call” today: Commodities, Value stocks (especially small-cap value), Japanese stocks
  • Idea of the week: Oil & Gas - ESIE Europe Energy sector ETF, and SPOG US Oil & Gas Exploration & Production ETF

The Big Calls: Easy to be wise in hindsight…

In investing, a surprisingly high portion of portfolio returns can come from a very small number of key decisions, taken infrequently.

There are a number of these key decisions that I have not taken full advantage of in recent years. Take the period from 2011 to the end of 2021. A stock market investor only really had to make one key decision - to invest heavily in the US Nasdaq technology-heavy index.

Nasdaq index, 2011-21

From 2011 to late 2021, the Nasdaq Composite index gained 650% versus 300% for the MSCI World index (both measured in US dollars), a massive level of outperformance.

1. Nasdaq Composite led stock markets 2011-21

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Source: BNP Paribas, Bloomberg

Chinese stocks, 2003-07

From 2003 to 2008, the key decision would have been to invest heavily in Chinese equities. You could have multiplied your money 8 times in less than 5 years.

2. Chinese stocks were amazing to late 2007

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Source: BNP Paribas, Bloomberg

Government bonds, 1980-2020

And of course, the biggest decision of all, was simply to stay invested in long-term government bonds from the early 1980s until early 2020, a span of almost 40 years! Doing this would have generated an average annual return of not far from 8% per year.

3. Government bonds: the ultimate “sleep easy” investment for 40+ years

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Source: BNP Paribas, Bloomberg

The question then is, what is/are the next Big Calls to make in investing?

These Long-Term Uptrends Followed a Poor Run

In each case, these long-term uptrends were preceded by long-term stretches of relatively poor performance:

  1. From 2000 (peak of Tech bubble) to the end of…

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