In this line of business it is not unusual to be asked to make some sort of reasoned forecast about the likely performance of financial markets.
When I am asked to do this, my usual starting point is to describe the most recent events in order to put some context to my forecast of returns.
I suspect that many investors will look at the current global economic performance and would expect the context to look increasingly good, particularly in Europe where developments appear to suggest that forecasts have been too negative.
From an economic perspective the global recovery has been patchy, with the west lagging at first, but then turning in a pretty decent turnaround for the past year or so.
This should suggest that after a period of poor or dull returns from financial markets we are all about to share in the recovery through our investments.
But therein lies the problem: returns have not been poor. A quick pop quiz, if you are game: since February 27 2009 – close to the bottom of most markets – until July 31 2013, what have been the local currency returns from equity markets in US, UK, Europe excluding the UK, Asia excluding Japan, global emerging markets, and Japan?
(Try to guess this before looking at the answers below. In fact I find it useful to write them down so there is no ‘revisionism’ when the answers are known.)
Well you may – or may not – be surprised that the US is 152 per cent, Asia excluding Japan 129 per cent, global emerging markets 115 per cent, UK 113 per cent, Europe excluding the UK 100 per cent, and Japan 65 per cent.
The context for the global economy may be that a patchy recovery is giving way to something that looks like an improving picture.
However, the context for equity markets – and most risky markets such as credit and emerging market debt – is that they have already done really well.
This may be due to efficient markets forecasting the economic turn in advance, but it is undoubtedly also true that extreme monetary policy, which has been adopted around the globe, has induced an asset reflation.
Investors need to perhaps ignore the economic context for a moment and contemplate instead the context of monetary policy to help a forecast of returns.
The most recent market jitters have been blamed on the unexpected move from the US Federal Reserve to begin to taper its monetary policy, with hints about the time frame surrounding the ending of the policy altogether.
To us, the US equity market has performed well enough to mean there is little value in taking the risk that this policy adjustment will have a negative impact.
It is noticeable that the two laggards in returns are Europe and Japan – two areas where we have seen little by way of monetary stimulus – yet – so these are our favoured areas for now.