I’ve opened the first window of my advent calendar this morning and the countdown to Christmas is well and truly on. Lots to do and many things to look forward to, so my focus on all things financial will fade. Not so for many in research departments who write hefty tomes with detailed economic and market forecasts for the next calendar year. The first of these started thumping through my letterbox/in-tray/email inbox in mid-November, and I know more will be arriving thick and fast for at least another fortnight. What I don’t understand is whether the authors really believe these will be read during the festive season.
Another thing that has grown again this year is the array of stock market and bond indices and exchange traded funds. Very often it is the houses producing the research that devise and provide indices to be tracked. It’s obviously a way to make a name for themselves and to pull in the punters. Many make sense and are used widely; others are a lot more dubious. Not naming names, generally the broader the index the less relevant it is. Think ‘global equity’ or ‘emerging markets’, ‘government bonds’ and ‘Asia Pacific’.
You could chuck just about any old thing into baskets like these. And remember, when you work with the average of an average, then average it again with something else, you end up with something bland, unresponsive, and probably not what you thought you were buying into. Even if you narrow your focus very considerably, you may find that the thing you’re tracking contains very disparate beasts.
I’ll give you a concrete example: today I’m looking at the main indices of four countries around the South China Sea – mature markets overall, although some still insist on lobbing them in to the emerging market bucket. Kicking off with South Korea’s Kospi Index of all common shares, you can see that it’s soared this year, putting on a good 25 per cent to hit an all-time high. Admittedly there was a certain amount of catching up having flatlined for the past five years. This is the sort of punchy chart that, except in 2008, has steadily been picking up the pace.
Compare with Singapore’s Straits Times Index, which has been calculated using the top 30 shares by FTSE since 1966, then rejigged in 2008. Like most indices, it suffered badly in the Great Financial Crash, but is today pushing up against the interim highs since 2010. Strong internal dynamics and bullish momentum hint at further strong gains next year.
Next, look at Japan’s Nikkei Index of top 225 shares, which garnered significant media coverage recently after tripling since 2008 (where the losses were smaller as the market had been in bear mode since 1990). It is now exactly halfway between peak and trough – not exactly impressive for a move that has lasted the best part of a generation. This index would have been a massive drag on any fund investing in the region.
Finally, ChiNext, China’s Growth and Enterprise Market for smaller companies and tech stocks. A newcomer that like its mainland siblings saw massive speculative swings in 2015. It has now settled down into something far more pedestrian and is unlikely to give a portfolio a serious boost.
The lesson here is, do your homework – properly.
