If you believe a recession is coming or more growth is on the way, the past may hold some answers on where to invest.
So far this decade, commodities have surged, tech stocks have rallied and overall investors have made money – despite the almost incessant flow of pretty terrible headlines.
As such, I was curious this week to see if history might help to navigate the current market conditions where both bulls and bears make convincing cases.
Since the start of 2020, the leading IA sector has been the IA Technology & Technology Innovation peer group, which has made 49.1% on average.
The sector was undoubtedly bolstered by the Covid pandemic, when there was a premium placed on anything related to tech as the world was effectively shut down by lockdowns.
However, despite the noise about these companies having lost their lustre in the past 18 months or so, they have held on to the gains made during 2020 – the halcyon time for growth investing.
The sector also came up trumps in the decade that preceded the current one (2010-2020), finishing second behind the IA Healthcare sector with returns of 310.3% and 313.8% respectively.
It could be argued that both these periods have been strong for growth investing, with interest rates low (until very recently), forcing investors to look towards companies that could grow in the future, rather than delivering today.
But many expect a recession in the near future. Earlier this week experts suggested a move away from high-risk assets, with a litany of concerns around the current macroeconomic environment.
If looking to history, investors would need to consider the returns made during the decade between 2000 and 2010, which was book-ended by two major global crises – the tech bubble and global financial crisis.
During this time, the IA Technology & Technology Innovation sector (undoubtedly under a different name back then) was the absolute worst place investors could have put their cash, with the average fund registering a 57.1% loss.
Tops in that decade was somewhat of a surprise – at least to me. Taking the top spot was the IA India/Indian Subcontinent sector, which made 277.3%. In fact, it has been the second-best performing sector so far this decade too, up 46.1% since 2020 – a rather unheralded achievement.
During the 2000s, commodities and their surrounding asset classes, including Latin American stocks and Chinese companies, were the place to be invested.
They say history never repeats itself and that it only rhymes – meanings there will be similarities but never an identical set of circumstances.
Therefore, punting on whether the 2020s will be more akin to the 2000s or 2010s may not be the best strategy. As I’ve already mentioned, asset classes such as tech and commodities that did well in one or the other of the prior decades appear to be doing well so far this time around.
There have, however, been consistent performers. IA Infrastructure for example made top-quartile returns in both the 2000s and 2010s among the full suite of Investment Association (IA) sectors.
The same is true of the IA Financials and Financial Innovation peer group, while other areas including healthcare, European smaller companies, China, India and Asia excluding Japan funds have all made above-average returns in each of the past two decades.
For fixed-income lovers, the global emerging market bonds (both the hard currency and blended sectors), US high yield and UK index-linked gilts made above-average returns in the prior two decades.
Will the same happen again? Perhaps not, but it goes to show that there are asset classes out there over the longer term that seem to be able to weather storms better that others.
If nothing else, it is food for thought. Does this mean I will run out and buy an India or emerging market bond fund? Possibly not, but it does give me pause about some of my holdings.
