Mondial Dubai - Chart Of The Week

What the chart shows

 This week’s chart shows the calendar year returns of nine major asset classes for the last ten years in US dollar terms, giving a clear picture of the volatility within the investment sphere. Asset class fortunes clearly vary each year and there is a number of examples when one year’s star performer may falter the next (see commodities from 2021/22 to 2023), or vice versa, when the class straggler jumps to the front (see US high yield bonds from 2015 to 2016). We can see that no single asset class stays a winner forever – a notion the US equity market has been challenging recently. Only once did an asset class remain on top for two consecutive years – commodities from 2021 to 2022. However, the subsequent plunge in 2023 serves as a stark reminder that trends can change rapidly. 

Why is this important?

The message from this week’s chart is a simple one: no single asset class consistently stays on top. This emphasises the need for diversification, providing a safety net against the unpredictable volatility experienced by individual asset classes each year. It is extremely difficult to select the best performing asset classes every year and winners rarely stay as winners. A key takeaway here is to avoid getting swayed by exciting stories – just because an asset class did well in the past doesn’t guarantee its future success. The best performer of one year can quickly become a laggard the next and short-term predictions often miss the mark. Even asset classes with prolonged success, like US equities, can’t guarantee perpetual dominance. Investors need to be prepared for anything, and we advocate the practice of investing in undervalued asset classes following downturns, weathering temporary setbacks and patiently waiting their comeback. After a highly unusual year in 2023, where economies and equity markets defied widespread pessimism and faced the steepest monetary tightening in 40 years, coupled with returns heavily concentrated in a narrow range of stocks, caution and selectivity are crucial in 2024. Given current valuations and uncertainties, a broad diversification approach will be maintained in portfolios, waiting for valuation opportunities to emerge in preferred assets and markets, remaining wary of extended valuations and excess leverage.