West vs. East: Which stock markets have performed best over the past 12 months?

This article reviews the performance of six major western stock markets and six major eastern stock markets to see which have been performing best and why.

Western stock markets

The chart below shows the performance of six major western stock markets over the past year. The markets are those of the US, Canada, the UK, France, Germany and Australia.

A 1 year (daily) chart of the US S&P 500 & 5 other western stock markets (Click on the chart for a larger version)

A 1 year (daily) chart of the US S&P 500 & 5 other western stock markets (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The performance figures overlaid on the chart show that the markets in both France and Germany have been the best performers. Over the past 12 months Germany’s DAX index has risen by 33.46%, while France’s CAC has risen 32.28%. The US market, represented here by the S&P 500 has also performed well, returning 28.01%.

The most significant factor driving western stock markets is the aggressive stimulus programmes that are being pursued by central banks such as the Fed and the ECB. Rather than concentrating on true structural reform and allowing market forces to bring about an economic rebalancing, these nations are applying ever greater doses of stimulus in the hope of re-igniting the global credit boom.

Several countries in Europe have also now concluded that austerity is not the answer to their problems and they too are looking for ways in which they can stimulate growth, though it’s worth pointing out that these countries did very little in the way of cutting spending and rather relied on raising taxes. The market is now anticipating further stimulus from the ECB.

The laggard among this group is the Canadian stock market with a 12 month gain of just 11.43%. Canada’s top companies are heavily influenced by the price of natural resources which have fallen significantly during the period.

Eastern stock markets

The chart below shows the performance of six major eastern stock markets over the past year. The markets are those of Japan, Indonesia, Malaysia, India, South Korea and China.

A 1 year (daily) chart of the Japanese Nikkei & 5 other Asian stock markets (Click on the chart for a larger version)

A 1 year (daily) chart of the Japanese Nikkei & 5 other Asian stock markets (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The performance figures overlaid on the chart clearly show the Japanese Nikkei as the star performer. Over the past 12 months the value of Japan’s top 225 publicly listed companies has risen by 74.62% and it shows little sign of stopping.

Indonesia is the next best performing market of those shown, with a 12 month return of 24.36%. The chart also shows the performance of the Malaysian stock market which for the past 6-8 weeks has closely matched that of Japan.

At the bottom of the charts with a rise of just 4.45% we have China whose economic growth has continued to slow. Gross domestic product in China grew 7.7% on a year-to-year basis in the first quarter of 2013, however this was down from 7.9% in the fourth quarter of 2012 and many analysts expect further economic deceleration.

In stark contrast to the US, Japan and many other nations, China is not engaged in massive stimulus efforts to boost growth. In fact, only this week Chinese Premier Li Keqiang was quoted in the state-owned China Securities Journal as saying that though the economy faces considerable headwinds, China should allow market forces to do their work.

Li was quoted as saying, “If there in an over-reliance on government-led and policy driven measures to stimulate growth, not only is this unsustainable, it would even create new problems and risks”.

It appears that unlike other G20 nations, China is focusing on long-term structural reform rather than shorter-term policies that simply delay the inevitable.

The bottom line

The best performing markets right now are those in Japan, Indonesia, Malaysia, France, Germany and the US. Just because these markets are largely being driven by reckless monetary policy rather than solid economic fundamentals, doesn’t mean that investors should steer clear of them.

Thanks to the advent of ETFs (exchange traded funds), it is easy for retail investors to gain exposure to all of these markets, however it is vital to have an exit strategy, preferably in the form of an automatic stop loss that will limit your downside in case of a sharp reversal.

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