‘M5’  Global Financial Markets

Comparing Asset Classes

Up-to-date as of: 30th April 2020

Exhibit-01 (above)

Chart-01 shows the latest 18 months of all four asset class baskets, rebased. As asset class, bonds once more are the winner over all others. That said, this statement does not take into account the impact of currency fluctuations, or differences in national market performance.

Exhibit-02 (below)

All M5 baskets (composites) have been given a base value of 100 on 31.12.1999. Table-01 depicts these values, current and 36 months ago, while also showing current distance from 36 months high and low. Equities are the only asset class currently significantly below a recent peak, bonds the only one making a new high. Foreign currencies (M4 basket) in Swiss Francs are marginally higher than their recent low. Monthly rates of change of almost all baskets deviate meaningfully from a ‚normal distribution’.

Exhibit-03 (above)

Normalised risk and return data from Table-01 are illustrated graphically, in the scatters of Chart-02, with risk shown horizontally, and return on the vertical axis. A dashed diagonal indicates equilibrium of risk and return. The scatter to the left refers to current data, the one to the right shows values of 12 months previous, as comparison.

Bonds were the only asset class to have compensated for risk during the recent three years, a rather different environment to the one last year.

Exhibit-04 (below)

Chart-03 plots M5 Composite Index values (M4 for Currencies) over the last 120 months (rebased to the chart’s starting date). The data is smoothed. Equities have all but erased the gains they made over bonds since 2016.

Exhibit-05 (above)

In Chart-03 equities and bonds are each shown relative to 1 Month LIBOR returns, thus illustrating the hierarchy of all three asset classes except FOREX exposure. The lower portion filters out the balance between equites and bonds.

Exhibit-06 (below)

Chart-05 displays assets in terms of trailing 3-year normalised rates of return plotted across 10 years. Note how equity and bond returns have both been slowing down, unable to reach previous peaks. Still, the length of time for which normalised equity returns have remained positive is extra-ordinary. Currently, the effect of smoothing the data is delaying the point in time when normalised equity returns dip into negative territory. 

Exhibit-07 (above)

Chart-06 shows risk the same way as the preceding Chart illustrated return. As an ex-post measure, observed risk is a contrary indicator and excessively high or low readings typically show a turn of cycle. Already by autumn 2018, risk for equities had recorded a level even lower (in the Chart ‚higher’) than 2015, suggesting a market that was not discounting any negative developments, potential or otherwise.

Exhibit-08 (below)

Table-02 shows actual values for all composite indices at fixed points in time: ten, five and three years ago, 12 months ago, latest year end and latest month end. In the lower portion of the table, the corresponding rates of return are calculated. The best (green) and worst (red) performing asset class of each period is highlighted, regardless of sign.

Exhibit-09 (above)

Jumping to a base at the end of 1999, Chart-07 shows rates of return since then. Once more, an extremely mature bond cycle has produced returns towering over the other assets.