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Regeneron Pharmaceuticals Inc
North American stocks posted the best risk-adjusted returns in the past three years as stimulus from the Federal Reserve helped spur profit growth and investors sought a haven in the world’s largest equity market.
The MSCI North America Index of 702 companies has rallied 2 percent since the end of 2009, after taking into account price swings, the most among 19 regional and global equity benchmarks, according to the BLOOMBERG RISKLESS RETURN RANKING. Volatility in the U.S. and Canada declined by 38 percent from the previous three years as equities recovered from the worst bear market since the Great Depression.
North American stocks have provided more stable returns as Europe’s debt crisis and inflation concerns in emerging markets prompted investors to seek safety in U.S. corporations. Fed Chairman Ben S. Bernanke’s focus on lowering the unemployment rate has helped speed the U.S. recovery, as the central bank took unprecedented measures to stimulate growth before its counterparts in other regions.
“When we fell off the edge in ’09, our policymakers didn’t hesitate in turning on the monetary spigots to full,” Paul Attwood, who helps oversee $14.7 billion at Huntington Asset Advisors in Cincinnati, said by telephone. “European counterparts were hesitant to do the same,” he said. “In the emerging markets, they were tightening policy up until about 12 months ago. That’s not an equity-friendly environment.”
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, and gives a measure of performance per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
U.S. stocks led by Apple Inc., Exxon Mobil Corp. and General Electric Co. make up about 91 percent of the MSCI North America Index (MXNA), with Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia representing the biggest Canadian companies in the gauge.
The MSCI World Index, which tracks stocks across all 24 developed market countries, had the second-biggest risk-adjusted return since the end of 2009, climbing 1.4 percent. The MSCI BRIC Index was the worst-performing measure out of 19, falling 0.6 percent after taking into account price fluctuations. The index lost 12 percent of its value before adjusting for a volatility that was higher than that of North America’s.
Slowing economic growth in 2007 coupled with a slump in the U.S. housing market pushed the Fed to embrace easy monetary policy faster than other central banks. Bernanke has left the Fed’s benchmark rate in a range of zero to 0.25 percent since December 2008 and the Fed’s dual mandate of price stability and maximum employment has prompted the U.S. central bank to conduct record bond purchases. The Bank of Canada dropped its target rate to as low as 0.25 percent in 2009 and has left it at 1 percent since September 2010.
The European Central Bank did not begin cutting its benchmark rate until October 2008. ECB President Mario Draghi has lowered the rate three times to 0.75 percent since assuming office November last year. European growth has been further crimped by German Chancellor Angela Merkel’s austerity-first policy toward indebted euro nations in exchange for rescue funds.
The threat of inflation prevented emerging-market central bankers from keeping interest rates at lows. The People’s Bank of China began reducing rates in September 2008 and raised them from 2010 through July last year. Since then, China’s central bank has cut its benchmark rate twice this year to 6 percent.
Brazil didn’t lower its benchmark rate until January 2009 and raised it from 2010 through July last year. It has since cut the rate 10 times by a total of 5.25 percentage points to a record low in order to boost growth in the world’s second- biggest emerging market.
Other developed markets and emerging economies in 2010 “started to falter because they started to exhibit their own unique risks,” Wasif Latif, vice president of equity investments at USAA Investments in San Antonio, said by phone. The firm oversees $54 billion. “Early 2010 was when Greece let the cat out of the bag with the debt crisis that we’re still dealing with. In emerging markets, being more volatile, fears of higher inflation and an economic slowdown greater than what was priced in started to worry the market.”
In the North American gauge, Tarrytown, New York-based Regeneron Pharmaceuticals Inc. (REGN) had the biggest risk-adjusted return, rallying 12 percent. Liberty Media Corp. in Englewood, Colorado, performed the second-best and Ulta Salon, Cosmetics & Fragrance Inc., the Bolingbrook, Illinois-based cosmetic seller, had the third-biggest return. Apple, the world’s most-valuable company and the stock with the largest weight in the MSCI North America Index, returned 5.6 percent in the three-year period after adjusting for price swings.
IPhone-maker Apple surged to an all-time high of $702.10 on Sept. 19 as it reported record yearly profit and introduced a new version of its iPhone. Royal Bank of Canada climbed to a record of $62.42 in May 2010 before the nation’s largest bank posted two straight years of profit growth. At the same time, China Mobile Ltd, the largest stock in the MSCI BRIC Index (MXBRIC), trades for about 43 percent below the all-time high it reached in October 2007, while Gazprom OAO has tumbled 23 percent in the last three years.
U.S. and Canadian companies posted smaller stock swings relative to other regions. The average one-day move in the MSCI North America Index, which represents $15.6 trillion in market value, has been 0.78 percent since 2009. That compares with 0.86 for the $7.8 trillion MSCI Emerging Market Index, 0.84 percent in the $6.8 trillion MSCI Europe gauge and 0.82 percent in the Asia-Pacific index, with a market capitalization of $9.5 trillion.
“North American markets indeed have less volatility because they are some of the largest and safest markets, with that comes less volatility on both the upside and downside,” Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati, said in an e-mail on Dec. 13. “The EM markets will always have higher volatility due to potential political unrest and other random events that historically have drastically hurt their markets.”
Huntington’s Attwood and Steven Bulko of Lombard Odier Investment Management predict that the risk-adjusted outperformance by North American shares won’t last. Greater room to ease monetary policy will help lift emerging market stocks, according to Attwood.
The North American gauge retreated as much as 5.3 percent between Election Day and Nov. 15 as President Barack Obama’s win set up a showdown with the Republican-controlled House of Representatives over the federal budget. U.S. lawmakers have been negotiating to avert more than $600 billion in automatic tax increases and spending reductions set to kick in next year.
“International equities may begin to outperform U.S. stocks next year as concerns over Europe’s debt crisis and an economic slowdown in China decline,” Bulko, chief investment officer of Lombard Odier’s $1 billion flagship equity-focused long/short fund, 1798 Fundamental Strategies Fund, said in an interview in New York on Dec. 10. “China’s improving purchasing managers’ index signals growth in the world’s second-largest economy has stabilized.”
China’s purchasing manager’s index rose to its highest level in seven months in November. Attempts by emerging-market central banks to battle inflation in commodity prices have held back their equities, according to Latif. The Standard & Poor’s GSCI Index of 24 raw materials surged 45 percent from Dec. 31, 2009 through April last year. It has since fallen 16 percent.
“As soon as you started seeing oil and food prices starting to have an impact, then growth in emerging markets was secondary to the fear of inflation,” he said.
China’s inflation climbed to a two-year high of 6.5 percent in July 2011, while consumer price increases in Brazil reached 7.3 percent in September last year. U.S. inflation over the past three years, by contrast, peaked at 3.9 percent in September 2011.
U.S. corporations have also done a better job in cutting costs and strengthening their balance sheets relative to their peers abroad, according to Douglas Cote, chief market strategist at New York-based ING U.S. Investment Management. Total debt in the MSCI North America Index shrank by 36 percent to $782 billion last year since 2007, while cash and near-cash items jumped 49 percent to $1.7 trillion, according to data compiled by Bloomberg.
Combined profit by companies in the MSCI North America Index is estimated to climb four straight years through 2013, increasing 82 percent in that period, according to data compiled by Bloomberg. Profit by emerging markets companies is projected to rise 67 percent in the four-year period, the data show.
“U.S. corporations gutted their balance sheets, restructured their companies from top to bottom,” Cote said in a telephone interview. His firm oversees about $165 billion. “They did the best job in restructuring for the new face of the world.”
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