Global Markets Asset Returns-Don't let the volatility overshoot you!

Analysis on the emerging market asset returns shows off sparkling figures and interesting features for the last 5-6 years. We all know how commodities are having a Spanish bull run for the last 5 consecutive years at a stretch, and how oil prices skyrocketed within a span of a year. And that's what odds for a surprise last year when the Subprime hit the market. The kind of hype subprime got, it seems like something's new has hit the markets, and most analysts were wary about how the subprime is performing! It has been a better within a worst last here, as many things are to be remembered, lest the subprime woes which investors do no like to face again this year. But odds may always win!

REIT's have defied the gravity for seven years till 2006 and lost -17% in 2007. Emerging markets assets performed better than the developed ones in terms of return, but have been more volatile however. Analysts have a view that bond markets will do better this year as investors are more concerned about the performances of high beta-asset classes-the emerging markets. But there are some structural long-term reasons for emerging market bullishness since developed market assets tends to be less attractive to international investors. The data shows how each of the asset classes performed within the last six years or so, and some correlations could be drawn on that bases. Emerging markets bond returns were highest in 2000, 'o3 and '06 when it gave 12.8%, 24.3% and 24.7% respectively. Emerging markets bond returned less in 2002 and '07 with 8.8% and 6.3%. US stocks returned a hopping 31.1% in 2003 after recovering from the dot com bubble bust, as they performed negative in 2000, '01 and '02. In contrast, emerging market stock returns were 51.6% in 2003, the highest till now, and subsequently gave 22.5% in '04, 30.5% in '05, 29.2% in '06 and 36.5% last year, according to Bloomberg. We notice that EM stocks performed remarkably for the last six years subsequently.

US bonds did better during the dot.com bust, with a return of 11.6% in 2000, 8.4% in'01, 10.3% in '02, that's 10% on average for three cumulative years. Data published by Bloomberg shows yields started falling from 2003, when it returned 4.1%, and 4.3% in '04, 2.5% in '05, 4.3% in '06 and rebounded to 7% in 2007. The only asset class that gave consistent returns along with EM stocks and commodities is the REIT sector, till it lost 17% in 2007. From this analysis and keeping in mind the subprime spill over, we can expect US stocks returns to rebound in 2008 at around 10-14% and commodities 14-18% as expected. REIT returns for the last 8 years have been around 20%, and we hope a re-bound in the REIT's sector this year. It is also true that assets that have performed their best till date are sometimes seen to lag in future. But the fear of a credit slowdown and US economic recession looms high on the horizons as analysts predict high volatility and uncertainty in 2008. Those who can hold their nerve and take a patient approach are likely to benefit, and there may be very few out there to reap out some real profit from this falling markets. The question of question is, where is the next best asset class? Where to diversify and mitigate market risks? And how fixed income is going to perform this year and should US slip into a recession, how the markets would react?

Continued next post....

Right Horizons Desk

Sources:Bloomberg, Thompsons