Global stock markets are the ultimate “risk on” asset.
When the U.S. stock market does well, global markets tend to do even better.
But there are some unwritten rules about global — particularly emerging — markets.
Investment in them is driven more by risk appetite than by fundamentals.
And the smaller the market, the more likely it is to be the year’s top performer. After all, it doesn’t take a huge wall of money to move a tiny market, like, say, Estonia.
After a lousy 2011, the MSCI Emerging Markets Index ended 16.9% higher in 2012.
Developed markets — as measured by the MSCI EAFE Index — also had a solid year, up 14.72%.
This caught many investors off guard.
After all, 2012 hardly started off as a banner year.
Back on June 30, the MSCI Emerging Markets Index was up only 3.47% for the year, and the MSCI EAFE Index was up by less than 1%. Meanwhile, the U.S. market was up over 8%.
Yet, thanks to a little-covered “stealth rally” in global stock markets during the past six months, both global stock indices ended up outpacing the U.S. market, which ended the year about 14% higher.
Global Stock Markets over the Past Decade
Up until the financial crisis of 2008, you made a lot more money investing in global markets than in the U.S. market.
And the numbers weren’t even close.
Going back a decade to April of 2003, the MSCI Emerging Markets Index rose 4.5-fold compared to the S&P 500 doubling over the same period.
That all changed in September 2008, when all risky assets — including emerging markets — fell out of bed.
And MSCI Emerging Markets Index went on to lag the U.S market for the next five years.
Developed global stock markets — as measured by the MSCI EAFE Index — fared even worse.
Global Stock Markets in 2011
Out of a portfolio of 36 exchange-traded funds (ETFs) that I follow for clients investing in the “Global Gains” Investment Program at my firm Global Guru Capital, not a single international market ETF was up in 2011.
Note that these are ETFs you can buy today in your brokerage accounts — and exclude inaccessible, obscure markets like Nigeria or the Ukraine.
An equally weighted average of these 36 ETFs fell by 18.21%.
The only market among the 36 ETFs to end the year in the positive column?
The United States.
And even that annual performance masked a stomach-churning drop in the S&P 500 in August and September of 2011.
The bottom line? In 2011, the United States was the only place to hide among the world???s stock markets.
Global Stock Markets in 2012
The contrast in 2012 could not be more striking.
In a mirror image of 2011, not a single global stock market I follow was down in 2012.
In fact, in 2012 the same portfolio of equally weighted ETFs, now numbering 37 funds after Greece was added in December 2011, was up 23.51%.
And many individual markets put in eye-watering performances, including Turkey, up 65.58%, the Philippines, rising 47.90%, and Egypt, climbing 44.56%.
In a year during which Europe was supposed to implode, Poland and tiny Belgium both clocked gains of more than 35%.
Even Greece soared 29.94%.
My Outlook for 2013
No doubt it has been a tough couple of years in global investing.
And despite the strong performance of the past six months, emerging markets closed 2012 below where they were two years ago.
And if you followed the crowd and invested in the highly touted BRIC markets — Brazil, Russia, India and China — you did much worse.
Not a single one of these markets recorded gains over the past two years.
In fact, they were down by an average of 17.52%.
The good news is that I think the stealth market of global stock performance during the last six months is the start of a turnaround.
First, the United States justifiably has been viewed as the safe haven during times of crisis. But as the markets gradually return to normalcy, the United States is also increasingly (and rightly) chided for its political dysfunction. And both U.S. and international investors are voting with their portfolios and increasingly putting their money elsewhere.
Second, in a world of zero interest rates on U.S. Treasuries, both developed and emerging market bonds have been re-rated by investors scouring the globe for yield.
These fixed-income investors routinely praise emerging markets for their superior macroeconomic fundamentals.
But thanks to excessive risk aversion, equity investors making the same point to their investors have fallen on deaf ears.
Once these fundamentals are recognized and sentiment changes, global markets will break out sharply to the upside.
The bottom line?
After almost five solid years of underperformance, global stocks are overdue for a re-rating.
2013 has already gotten off to a strong start with both Greece and Germany up — 4.54% and 4.09%, respectively.
The biggest gains come fast and they come early. And you can take part by investing in iShares MSCI Emerging Markets Index (EEM) and the iShares MSCI EAFE Index (EFA).
So don’t miss out on the coming big gains in global markets in 2013.
It just may turn out to be a very big year…
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
Nicholas Vardy, CFA
Editor, The Global Guru