I really have to make this premise: every end of December, wherever I look, I come across glowing Forecasts on what will happen on the financial markets in the following twelve months. This always leaves me perplexed, since any individual of average intellectual honesty knows that the world of finance is dominated by noise and not by signal. In other words, the random component plays a very important role... if it were up to me, at the bottom of the financial forecasts I would be obliged to write a disclaimer such as: "The undersigned declares that in reality he doesn't have the faintest idea of what will happen in the future and therefore the forecasts in question are only mere speculations”.
Precisely for this reason we at Advise Only avoid punctual forecasts like the plague and limit ourselves instead to identifying critical factors to keep an eye on and to make prudent assessments from which everyone can draw their own considerations. Furthermore, and this is what I am doing now, we try to create summaries useful for better understanding the dynamics of the markets.
What I want to share with you is the 2012 financial statements for the main asset classes, considering the performance (total return, i.e. including coupons and dividends) and the risk (represented by the maximum possible loss, the Max Drawdown) that the various types of investment manifested in the period 30 December 2011 – 28 December 2012.
The exercise is in itself absolutely trivial, but it has the advantage of offering an overview, capable of bringing out some food for thought.
– 2012 was a year of excellent performance for many asset classes, but also of enormous risks.
– Investments with stellar performances have involved great risks. A concept therefore clearly emerges which, I am sorry to say, does not want to enter the pumpkin of some savers: risk is a necessary (but not sufficient) condition for good performance. In short: “No risk, no reward”.
– As a corollary, it must be said that low-risk assets in times of crisis are a rare commodity: everyone asks for them, therefore they offer low performances. This is the case of government bonds of countries considered, rightly or wrongly, "safe", such as Switzerland or the Nordic countries. This is also the case for “hard” currencies, which, apart from the yen, have recorded negative returns.
– The bonds of the so-called "Peripheral" countries benefited greatly from the improvement in the financial climate (which you can follow with our Risk Barometer ) and from the greater risk appetite resulting from the action taken by the ECB to secure the European financial system.
– Stock exchanges did well almost everywhere, with the notable exception of Spain. The Italian stock exchange sprinted towards the end of the year and closed well, also thanks to the substantial contribution to the "total return" provided by dividends.
– Precious metals have had a gray year. After all, they only protect in the event of a disaster.
– The other commodities had performances that reflect the bad global economic situation: the only exception were agricultural commodities, whose prices benefited from the lack of supply, due to climatic/weather reasons, combined with substantial demand.
Who would have imagined these numbers in December 2011?
