I didn’t make many predictions in my first letter of this year, but the main one was a call for a contrarian trade of the decade. Sell emerging markets and buy developed markets, I said.
So contrarian was this as an idea that even Bill Bonner – who rarely knowingly turns down a non-consensus thought – told me it was a bit nuts. Still, so far so good. The trade as a whole is working out. In sterling terms, Brazilian stocks are up 3.5% and Chinese stocks are up 7.4%. That’s nice. But it is nothing compared to what’s been going on at home. The FTSE 100 is up nearly 9%, the FTSE 250 is up 23% and Japan – the call we love and everyone else still appears to loath – is up 14%.
The same trend holds if you look at the markets in dollar terms. The FTSE BRIC 50 is up 3% (although that low figure masks great performances in India and Russia), but the US is up 11.6%, Japan 9.6%, Germany 5.1%, and the UK a less impressive but adequate 3.5%, according to the FT. Clearly, there are all sorts of currency effects working here. But the key point, as Société Générale’s Andrew Lapthorne notes, is that investors shouldn’t necessarily listen to economists. Research regularly shows that there is no positive correlation – and there might even be a slight negative correlation – between economic growth and stockmarket returns.
The only other specific prediction I made, beyond the usual suggestions that you stay out of the buy-to-let market and hang on to your gold (up 27% in 2010 so far – 32% for sterling holders) was about gilts. At the time, Gordon Brown was still in government and we had no concrete plans about how to reduce the speed at which we’re adding to our vast national debt. Given how unforgiving markets are these days, that scared us. If there is no change, I said, a downgrade to the UK’s credit rating would become “a matter of when, not if”. I suggested you sell and, in an echo of Bill’s trade of the decade (sell Treasuries, buy Japan), that you buy more Japan instead.
The good news is that there has been a change, of course. We have a new government with a plan, one that has kept markets sweet for some time now. The net result is that those invested in gilts have done well this year – making an average total return of about 6%. However, thanks to sovereign debt worries and rising inflation expectations, things have gone our way in the last few months. Back in September, they were sitting on average total returns of more like 10%. It might be that the 30-year bull market in bonds is finally coming to a nasty end. I’m still not holding any gilts.
So what of next year? There will be no MoneyWeek next week, so we’ll give you our predictions in the first issue of next year, out on 7 January. In the meantime, a very Merry Christmas and Happy New Year to all our readers.