In last month’s article we attempted to demonstrate the randomness of returns on a country by country basis.

Now consider the performance of the US and Denmark, shown in the table below. Is it immediately clear which country had the higher return over the past two decades?

Who Performed Better over the 20 Year Period?

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Denmark, in fact, was the best performer among all developed markets, with an annualised return of 10.6%. Surprisingly perhaps, Denmark had the best calendar year return only once, in 2015. The US, despite some strong returns in the last several years, was placed ninth overall with an annualised return of 6.3%. Bear in mind, Denmark represents less than 1% of the global market cap available to investors.

From first to worst

Denmark also provides an example of the unpredictability in short-term results. After posting the highest developed market return in 2015, Denmark had the lowest return in 2016. Countries have also moved in the opposite direction, from worst to first, in consecutive years. In 2000, New Zealand had the lowest return among developed markets followed by the highest return in both 2001 and 2002. In emerging markets, Hungary and Russia went from the bottom two performers in 2014 to the top two performers in 2015.

Going to extremes

In a single year, the difference between the return of the highest-performing country and the lowest can be dramatic, as shown below. Among developed markets over the last 20 years, the difference between the best and worst performers has ranged from a low of 26% in 2018 to as much as 72% in 2009. The differences in emerging markets are even more pronounced, ranging from 38% in 2013 to 179% in 2005. In fact, the difference in emerging markets has exceeded 100% in several years.

These extreme differences in outcomes, combined with the examples of countries that experienced sharp reversals in their return rankings, highlight the risk of trying to predict future returns by looking at the past and emphasise the importance of diversification across countries.

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Now, the good news

This evidence of the randomness in global equity returns, though, is not bad news for investors. Rather than trying to guess which country is going to outperform when, investors committed to a well-structured, globally diversified portfolio are better positioned to capture the performance of the global markets, wherever and whenever it occurs.

Over the last 20 years, every pound invested in a globally diversified strategy grew nearly fourfold.

A globally diversified approach can deliver more reliable outcomes over time with less volatility than investing in individual countries. This can help investors stay on track, through all kinds of markets, toward their long-term goals.

Growth of £1



Past performance is not a guarantee of future results. Diversification neither assures a profit nor guarantees against loss in a declining market. Investing risks include loss of principal and fluctuating value. International investing involves special risks, such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. There is no guarantee an investing strategy will be successful.

October 2019