During the depths of euro crisis, the countries at the edges of the Eurozone, with the greatest debts and weakest economies, became known collectively as the Pigs. They were Portugal, Italy, Ireland, Greece and Spain.
It all seems such a long time ago now, but back in 2008 and 2009 we were wondering whether the Euro might survive the crisis. Protesters rioted, governments toppled and we all began to count the cost of sustaining the world’s most ambitious currency project. The region’s economic recovery since those dark days has been patchy. Greece remains in a deep recession while some of the Piigs have made a partial recovery. Spain, for example, has experienced short periods of growth since the crisis, but its unemployment rate is 25% (among younger people it is 57%*).
You might be surprised to hear, therefore, that some of the Piigs were among the top performing stock markets last year. Greece was the second best performing market, returning 48%; Ireland was fourth (38%); Spain eighth (29%); and Italy seventeenth (18%).**
Two things can be learned from this:
Firstly, that a country’s economic strength has little to do with the return of its stock market. Therefore, predicting how well a country’s economy is going to do is unlikely to enhance your investment return.
Secondly, that the top and bottom performers every year are virtually impossible to predict. Who would have thought a year ago today that virtual neighbours Argentina and Peru would appear top and bottom of the list (+63% and -31% respectively)? This chaotic pattern illustrates how random the relative returns of each country are.
The way to combat the practical problem caused by the points above is to employ an investment strategy that is not reliant on making predictions about economies or investment returns and to hold a little bit of everything like our portfolios.
Doing this will mean you hold some winners and some losers, but also that you are not paying someone to make the near-impossible predictions about what investment will do the best.
*Source: Trading Economics
**All performance data is from Dimensional’s Returns Programme which sources data from MSCI indices. Countries on the list are those in the MSCI All World Index which is all developed and emerging markets – a total of 49 countries.