30 year ago today, traders were having a bad day: the Dow, S&P 500, FTSE, DAX and CAC fell -23%, -20%, -11%, -9% and -10% respectively. The FTSE fell a further 12% the day after, reflecting the difficulties in fully reopening
the market after the great storm a few days before. The day would eventually become known as Black Monday.
In a "bit of fun" Deutsche Bank's credit strategist, Jim Reid, decided to calculate where returns would be today had you bought various assets the morning after the crash. For this the credit analyst used his regular monthly template of assets, and notes that the most important decision to have made was whether to buy the S&P 500 or the Nikkei back in October 1987. The former tops the charts and has returned +2123% (+10.9% pa) since this day and the latter is at the bottom of the pile returning a meager +12% (+0.4% pa). These are local currency returns but even if you were dollar hedged, the Nikkei still only returns a relatively small +41% (+1.1% pa).
Another interesting observation: outside of the Nikkei, the three bottom performers have been commodity based with the CRB index (+60%, +1.6% pa), Oil (+163%, +3.3% pa) and Gold (+166%, +3.3% pa).
This shows how difficult it is for commodities to keep up over time with income producing securities with compounded interest or dividend reinvestment. In fairness when we look at dollar hedged returns Greek equities do fall to the bottom of the pile at just +27% (+0.8% pa) given the huge depreciation in the Greek Drachma prior to the Euro.
Considering the turmoil around the Euro Sovereign Crisis it’s impressive that Italian and Spanish Government bonds make the top 5 performers in local currency terms returning +1086% (+8.6% pa) and +1037% (+8.4% pa) respectively over the period. Obviously the Euro convergence story from very high starting yields and in later years ECB bond purchases have provided the impetus here. To repeat these returns over the next 30 years their respective yields would have to migrate towards -21%. Which after the next deflationary crisis, which will unleash even more NIRP and QE is not exactly unthinkable.
In this context, for US Treasuries to repeat the +602% (+6.7% pa) returns out to 2047 we’d need to see -18% yields at the end of our journey. As Reid explains, "We’ve calculated this on what the returns would be if yields moved to that level tomorrow and were then stable for 30 years. A bit spurious but an illustration of how impossible it will be to get anywhere near these type of returns again."
Meanwhile, US HY investors can claim to lead the way in fixed income returns though with a +1106% (+8.7% pa) return over the period. The DAX sneaks into the top 5 in dollar adjusted returns and pips Spanish and Italian debt as the DM mark appreciated and the Peseta and Lira depreciated in the following 12 years leading up to the introduction of the Euro.
The table and chart show the full list of performers over the period, first in local currency terms...
... denominated in USD...
... and combined.