Investors have done spectacularly well in recent decades by snapping up “broken” assets.
If the same trend holds true this time around, investors in value stocks and emerging markets are poised for much better times ahead.
“The press is often quick to label asset classes broken,” according to a recent report from Research Affiliates LLC, a market analysis firm based in Newport Beach, Calif. “Rarely is this the case, although exceptions do exist.”
The report’s co-authors, John West and Amie Ko, point to several cases where despised categories of investments staged massive comebacks after being given up for lost.
The most famous example is U.S. stocks, which were declared dead by Business Week magazine in an August, 1979, cover story.
In another premature obituary, investing newspaper Barron’s sneered at real estate investment trusts (REITs) in 1998 and questioned whether they still deserved a place in investors’ portfolios. A year later, Economist magazine did its best to discourage commodity speculators by declaring that oil at under US$20 a barrel was cheap and “is likely to remain so.”
Other experts wrote off small-value stocks in 2000, and still others dismissed high-yield bonds in December, 2008.
So much for the wisdom of pundits and experts.
In the five years after an asset class was declared broken, each roared back,” Mr. West and Ms. Ko write. During their five-year rebounds, REITs, commodities, small-value stocks and high-yield bonds beat the broad stock market by an average 15 per cent a year.
To be sure, such revivals don’t always occur. People who bought Russian or German stocks during the First World War never got their money back, for instance. But the evidence, at least in North America over the past few decades, is that asset classes rarely die.
“Our primary point is not to conclusively say that bottom-decile performance will be succeeded by brilliant subsequent returns,” they write. Instead, their central contention is that investors shouldn’t run for cover when experts claim that an asset class is permanently broken.
Investors in emerging-market stocks and value stocks have been hearing the naysayers for a while. Both asset classes have fared dismally in recent years and both were declared permanently broken by prominent publications over the past year.
Mr. West and Ms. Ko stress how similar the plight of these two despised asset classes is to similar situations in the past where strong rebounds took place. However, they don’t build a specific case for either value stocks or emerging-market stocks.
There are good reasons for their caution. Emerging markets have been rocked by the novel coronavirus and growing trade tensions. Value stocks – that is, stocks trading at relatively low prices compared to their earnings and other company fundamentals – have fallen into disregard as investors chase shares of fast-growing online businesses.
Rather than betting big on a quick rebound in emerging markets and value stocks, investors may want to focus on the broader lessons from the Research Affiliates survey.
The report demonstrates that any asset class is likely to endure protracted patches of rough performance. Good investing consists in large part of looking beyond those ups and downs and remaining diversified and patient, Mr. West and Ms. Ko assert. In today’s turbulent market, that seems like an excellent point to keep in mind even if you don’t own value stocks or emerging-market investments.
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