As we approach the end of the end of the third quarter, all of the major indices are in the black for dollar investors year to date, both in equity and fixed income.
Coming on the back of 2016, which was a bumper year for almost every market, it is easy to see why investors believe valuations are looking a little stretched. However, unlike last year when the markets that were making the most noise were the developed economies, it has undoubtedly been the year of the emerging market.
Of the 43 indices that we have singled out as most relevant to US investors, there are only two developed market benchmarks that make the top 10 – the German all-cap index (CDAX) and the pan-European index (FTSE World Europe). However, much of these returns have come from the euro, which has risen by 12.5%, and sterling, which is up 9.2% against the dollar.
With China, greater China (Golden Dragon), India (BSE 500) and Brazil all well out in front, it reads like the heady days of the early 2000s, when the BRICs would regularly top the league tables. The notable absentee is Russia, which after being tipped for great things following Donald Trump’s presidential election victory has failed to live up to that promise during a yo-yo year. Were it not for a 6% appreciation in its currency and an 18% rise in the third quarter, Russia would be in the red.
Just below the top 10 lies the Russell 1000 Growth, which is up 19% after rising 27.7% in 2016. The technology-fuelled growth index has once again trounced its value sibling, which has climbed only 7.6% in 2017. Sandwiched between them is the S&P 500, with a 13.2% rise, which again comes off the back of an astonishing 33.6% rise in 2016.
In fixed income, emerging markets win again. The local currency index has climbed 14.4%, while the hard currency equivalent is up by a more modest 8.7%. Closer to home the high yield index has added 6.9%, while the bottom of the investment grade corporates, which has proven a hit with fixed income managers, is up by 5.7%.
Municipals too have rebounded sharply following the difficult fourth quarter of last year and are positive in each calendar quarter this year, amounting to a 5% gain for the broad index.
Clearly the year to date has been a strong one, but the challenge really starts now. The end of loose monetary policy will mean that companies and countries must find genuine business and GDP growth, which is easier said than done. Not only that but the tapering or reduction of central bank balance sheets comes with many potential pitfalls. Good luck out there.