During the depths of euro crisis, the countries at the periphery of the Eurozone, with the greatest debts and weakest economies, became known collectively as the Piigs. 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 single currency 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%*).

So ‘pigs’ really can fly?

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.

  •  First, 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.
  • Second is 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)?  The pretty and chaotic pattern in the charts below illustrates how random the relative returns of each country have been over time.

 Randomness of Returns – Developed Markets

Developed Markets Growth Rates

 

 

 

 

Randomness of Returns – Emerging Markets

Emerging Markets Growth Rates

 

 

 

 

 

 

 

 

 

 

A disciplined practice of true diversification

The way to address the challenges 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.

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 which investment will perform the best.

This means you keep your investment costs to a minimum so you can optimise your returns.  You create an appropriate asset allocation and you diversify your portfolio.  All of which are core principles of our investment approach at MFP Wealth Management.

 

*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.

 

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