Mercer’s ‘Periodic Table’ of Investment returns 

Investors might have assumed that off the back of a weak year in 2022, we would be in for another round of negative blows. With an environment of rising interest rates, sluggish economic growth, high inflation and ongoing conflict in Ukraine, optimism on the outlook for investment markets would have been misplaced. There was also a distinct risk that economies worldwide would enter a recession and that stock markets would continue their downward trajectory.

However, as is often the case, new information emerged and was duly assimilated into asset prices. Investor concerns gradually subsided as declining inflation, resilient economic growth and the perception that interest rates had peaked made the possibility of a “soft landing” seem more of a reality. There were bouts of sell-offs, but by the end of 2023, many major equity indices had achieved new highs and bond markets had reverted to producing positive returns, leaving investors almost as bemused as they were pleased.

Predicting returns over a single year is always fraught, as demonstrated by our "Periodic Table" of investment returns. Produced each year, the Table colour-codes 16 major asset classes and ranks how each performed, on an annual basis, over the last 10 years. The myriad returns generated by markets over time underscores the challenge of discerning patterns and forecasting what may eventuate in the periods ahead.

Let’s take a closer look at some of the outcomes from last year and the decade as a whole:

• 2023 was the year of Global Equities. Whether on a currency hedged (+23%) or unhedged (+24%) basis, the sector surpassed nearly all expectations and proved unbeatable. The Technology sector, in particular, was the place to be, with the US NASDAQ Index rising a startling 45%. Apple and Microsoft were both up around 50%, but the biggest winner was Nvidia, up 240% as the chipmaker rode a wave of demand arising from the trend toward use of Artificial Intelligence. Regionally, Japan was a stand-out performer after being a laggard for many years. Signs of reform picked up pace and investors became more confident in the economy’s growth prospects.
  
• While not shown in the Table, 2023 was another year of wide dispersion between “growth” and “value” style stocks. Aided by the strength of the technology sector, there was a return difference of 25% in favour of global growth companies. This was a complete turnaround from 2022 when value outperformed growth by the same percentage. Mean reversion at work!
  
• Global Small Cap Equities (+16%) was another example of a sector bouncing back into favour. While still outmuscled by “mega cap” stocks which has developed into something of a trend, Small Companies finished the year strongly amid attractive valuations and a more benign outlook for interest rates. The sector joined its Equity market counterparts in the top half of the Table over the decade as a whole.
  
• Global Listed Property was also buoyed by easing bond yields and some improvement in sentiment, finishing the year with a creditable return (+9%) as it strived to put the tumultuous effects of the Covid era behind it. Its counterpart, Global Listed Infrastructure, was less favoured, delivering a flat return for the year.
  
• Emerging Market Equities (+10%) continued to lag their Developed Market counterparts in 2023. India put on a notably strong surge. However, the largest constituent in the index, China, had a woeful year as it endured stresses in the property market and an economy in the doldrums. The wider sector positioned itself mid-Table over the decade as a whole, defying a higher ranking that its risk characteristics might imply. Meanwhile Emerging Market Debt (+8%) enjoyed one of its better spells in 2023. 
  
• The gloves were off for the Trans-Tasman battle of the share markets, but it was convincingly won by Australia in 2023 with that market up 13% compared to a more pedestrian 4% closer to home. All is not lost for longer-term domestic investors, however, as the New Zealand market outpaced Australia by an average of 3% per annum over the decade as a whole.
  
• Also in the riskier asset category, Global Private Equity (+4%) was behind the pace of most share markets in 2023. However, the return potential is hard to ignore for those investors who can access it and accommodate the reduced liquidity. The sector has consistently avoided lower quartile annual outcomes and positioned itself as the undisputed champion over the full 10-year period.
  
• After suffering from the headwind of swiftly rising yields in 2021 and 2022, Fixed Interest rediscovered its lustre last year. Bolstered by friendly signalling late in the year by Central Banks on the outlook for monetary policy, New Zealand Bonds (+5%) and Global Bonds (+7%) again earned their place as a staple in balanced portfolios. Don’t rely on the sectors to catapult your savings, however, as their lower rankings over the full decade confirm.
  
• After entering the ring with a chart-topping performance in 2022, Commodities tumbled down the rankings last year to more familiar territory, settling in bottom place (-8%). While precious metals such as gold held up relatively well, energy and soft commodities had a tougher time. The asset class has placed in the bottom three slots in seven out of the last 10 years, and takes the prize for the lowest return over the full period.
  
• The relatively defensive sectors of Hedge Funds (0%) and New Zealand Direct Property (-2%) were the other asset classes filling out the bottom ranks in 2023. In “risk-on” phases as we saw for much of last year, most asset classes other than Equities looked rather groggy. And while relatively high Cash rates held their attraction as a low-risk option (+5%), money in the bank remained not very effective as a hedge against elevated inflation. 
  

All in all, 2023 serves to teach us that financial markets rarely deliver, on a year-to-year basis, quite what we expect. Anything can happen during the course of one round. While at times it may feel like your investments are on the canvas, the strength of a diversified portfolio enables you to set your sights on staying the distance.

Mercer holds a set of investment beliefs that underpin our approach and drive investment success which includes dynamic asset allocation, risk management, sustainability, operational efficiency, and active management.