The train kept a-rollin’, all night long,
With a heave, and a ho,
Well I just couldn’t let her go.
–The Yardbirds
Risk, we’re so often told, reaps reward. If there are exceptions to this rule from time to time (and there are) it’s less than crystal these days.
As the chart below reveals, risk across the board has paid off handsomely in the recent past. As a snapshot of the past, this is a reason to celebrate, at least for those who’ve been long in certain asset classes. But the chart also represents a challenge, namely, where to deploy money now? Does this chart draw the profile of bull markets still in their prime? Or does the layout of the returns give you pause?
Emerging markets stocks, the riskiest of the asset classes in our survey, is the clear leader so far this year and for the past three years as well. In fact, equities generally, and a broad mix of commodities, occupy the top half of the performance roster, while the lagging returns are populated exclusively by bonds of various kinds, the so-called safer investment species. The pattern is true for both year-to-date and trailing 36-month returns through May 2.
Indices/Funds: MSCI EM ($), Russell 2000, MSCI EAFE ($), MSCI REIT, S&P 500, DJ-AIG Commodity, ML HY Master II, 3-mo T-bill, Pimco EM Bond Fund ($), Lehman Bros. Aggregate, Pimco Foreign Bond ($), Vanguard Infl Prot Sec
The dollar-based advance in emerging markets stocks is especially hot. The MSCI Emerging Markets equity benchmark has soared by annualized 42% a year after translating the gains back into greenbacks. By any standard for asset classes, American investors have been treated to a level of profits rarely witnessed in so short a period. Even the red-hot commodities sector overall hasn’t kept pace with the stocks of emerging markets from a dollar-based perspective.