Equities — an ‘even years’ curse?
Are global equity markets under an ‘Even Years Curse’ that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International’s’ director of asset allocation Trevor Greetham suspects so.
“It’s not just hocus-pocus but to do with global inventory levels,” he explained at a forum organised by the London-based investment house.
The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.
Looking at the MSCI All World Equity Index, Greetham found equities generating a 69-percent return over the 12-year period starting from 1998. Breaking this down into odd and even years, equities went down by 30 percent in even years, and up by 143 percent in odd years.
On an annualised basis, growth was 4.5 percent, down three percent in even years and up 7.7 percent in odd-numbered years.
Compared against the JPMorgan Government Bond Dollar Index, equity returns beat bonds by 13 percent per annum on an average compound basis during odd-numbered years. In the even-numbered years, global stocks underperformed bonds by 15 percent.
The markets seem to bearing out this theory. Global stocks are down nearly 5 percent since the start of the year after a stellar 31.5 percent-gain in 2009.
Roll on 2011!