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Charted: The Key Investment Theme of Each Decade (1950-Today)

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The Key Investment Theme of Each Decade (1950-Today)

The Key Investment Theme of Each Decade (1950-Today)

Visualizing the Key Investment Theme of Each Decade

Over modern history, a key investment theme has broadly characterized each decade.

In each case, a particular asset class, sector, or region captivated investors for an extended period, driving returns and outperforming the rest of the market.

This graphic shows 70 years of key investment themes, based on analysis from Ruchir Sharma of Morgan Stanley Investment Management via NS Capital.

Investment Themes by Decade

These decade-defining themes are often the product of a confluence of factors, including the macroeconomic environment, geopolitics, monetary policy, or other structural shifts like technological disruption.

Here are the central investment themes since the 1950s, each with at least 400% cumulative returns over each period:

DecadeInvestment ThemeIndex / Asset
1950sEuropean StocksEurope GFD Composite
1960s“Nifty Fifty” StocksU.S. Nifty 50
1970sEmerging Markets / CommoditiesGold and Oil Prices*
1980sJapanese StocksTOPIX Index
1990sAmerican TechNasdaq Index
2000sEmerging Markets / CommoditiesBRICs and Oil Prices**
2010sAmerican “Mega Caps”FAANG

*Price change for gold and oil, represented as an average. **Equity market performance of Brazil, Russia, India, China and oil prices, represented as an average.

The 1950s saw a boom in European stocks during the post-war recovery. This was fueled by significant investment from corporations and governments as Europe became more integrated.

Then in the 1960s, investors poured into blue chip stocks in the “Nifty Fifty” including Johnson & Johnson, Disney, and Coca-Cola. The main premise was that these strong franchises would deliver high returns over the long run. During the 1973-1974 bear market, shares cratered.

As oil skyrocketed from $3.35 to $32.50 through the 1970s amid production and output cuts, commodities dominated, along with emerging economy exporters of oil and gold.

Later, through the 1980s, Japanese stocks dramatically increased. In 1989, the Tokyo Stock Exchange made up 41% of all global equities. It had eclipsed the value of the U.S. equity market just two years earlier.

In part owing to strong U.S. economic growth, American tech stocks flourished through the 1990s. While many high-flying tech stocks were wiped out during the crash in 2000, some still remain today. Qualcomm, which jumped 2,620% in 1999, is a multi-billion dollar semiconductor company. Amazon and Cisco were other survivors of this era.

Pivoting from growth assets, investors returned to commodities and emerging markets over the 2000s, this time with BRIC economies—Brazil, Russia, India, and China. The 2010s saw the rise of FAANG stocks as tech proliferated across countless industries.

The Next Decade Ahead

Given how each decade seems to be defined by a key investment theme, Sharma suggests that it won’t be another driven defined by American stocks.

The disconnect between the size of U.S. equity markets, at 43% of the global share, and its economic output, which is 26% of the world’s total, is one reason driving a new shift.

Another factor is stark differences in valuations. Today, the U.S. stock market compared to the rest of the world is at its highest relative level in 100 years, suggesting it is overvalued and primed for a shift.

Whether global stocks gain a greater global equity market share—to become a key investment cycle of this decade—remains an open question.

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Markets in a Minute

Visualizing Portfolio Return Expectations, by Country

This graphic shows the return expectation gap between investors and advisors around the world, revealing a range of market outlooks.

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Visualizing Portfolio Return Expectations, by Country

Visualizing Portfolio Return Expectations, by Country

How do investors’ return expectations differ from those of advisors? How does this expectation gap shift across countries?

Despite 2022 being the worst year for stock markets in over a decade, investors around the world appear confident about the long-term performance of their portfolios. These convictions point towards resilience across global economies, driven by strong labor markets and moderating inflation.

While advisors are optimistic, their expectations are more conservative overall.

This graphic shows the return expectation gap by country between investors and financial professionals in 2023, based on data from Natixis.

Expectation Gap by Country

Below, we show the return expectation gap by country, based on a survey of 8,550 investors and 2,700 financial professionals:

Long-Term Annual
Return Expectations
InvestorsFinancial
Professionals
Expectations Gap
🇺🇸 U.S.15.6%7.0%2.2X
🇨🇱 Chile15.1%14.5%1.0X
🇲🇽 Mexico14.7%14.0%1.1X
🇸🇬 Singapore14.5%14.2%1.0X
🇯🇵 Japan13.6%8.7%1.6X
🇦🇺 Australia12.5%6.9%1.8X
🇭🇰 Hong Kong SAR12.4%7.6%1.6X
🇨🇦 Canada10.6%6.5%1.6X
🇪🇸 Spain10.6%7.6%1.4X
🇩🇪 Germany10.1%7.0%1.4X
🇮🇹 Italy9.6%6.3%1.5X
🇨🇭 Switzerland9.6%6.9%1.4X
🇫🇷 France8.9%6.6%1.3X
🇬🇧 UK8.1%6.2%1.3X
🌐 Global12.8%9.0%1.4X

Investors in the U.S. have the highest long-term annual return expectations, at 15.6%. The U.S. also has the highest expectations gap across countries, with investors’ expectations more than double that of advisors.

Likely influencing investor convictions are the outsized returns seen in the last decade, led by big tech. This year is no exception, as a handful of tech giants are seeing soaring returns, lifting the overall market.

From a broader perspective, the S&P 500 has returned 11.5% on average annually since 1928.

Following next in line were investors in Chile and Mexico with return expectations of 15.1% and 14.7%, respectively. Unlike many global markets, the MSCI Chile Index posted double-digit returns in 2022.

Global financial hub, Singapore, has the lowest expectations gap across countries.

Investors in the UK and Europe, have the most moderate return expectations overall. Confidence has been weighed down by geopolitical tensions, high interest rates, and dismal economic data.

Return Expectations Across Asset Classes

What are the expected returns for different asset classes over the next decade?

A separate report by Vanguard used a quantitative model to forecast returns through to 2033. For U.S. equities, it projects 4.1-6.1% in annualized returns. Global equities are forecast to have 6.4-8.4% returns, outperforming U.S. stocks over the next decade.

Bonds, meanwhile, are forecast to see 3.6-4.6% annualized returns for the U.S. aggregate market, while U.S. Treasuries are projected to average 3.3-4.3% annually.

While it’s impossible to predict the future, we can see a clear expectation gap not only between countries, but between advisors, clients, and other models. Factors such as inflation, interest rates, and the ability for countries to weather economic headwinds will likely have a significant influence on future portfolio returns.

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Markets in a Minute

Recession Risk: Which Sectors are Least Vulnerable?

We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.

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Recession Risk: Which Sectors Are Least Vulnerable?

Recession Risk: Which Sectors are Least Vulnerable?

In the context of a potential recession, some sectors may be in better shape than others.

They share several fundamental qualities, including:

  • Less cyclical exposure
  • Lower rate sensitivity
  • Higher cash levels
  • Lower capital expenditures

With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.

Recession Risk, by Sector

As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:

SectorMargin (p.p. change)
🛒 Retail
-0.3
📝 Paper-0.8
🏡 Household Equipment-0.9
🚜 Agrifood-0.9
⛏️ Metals-0.9
🚗 Automotive Manufacturers
-1.1
🏭 Machinery & Equipment-1.1
🧪 Chemicals-1.2
🏥 Pharmaceuticals-1.8
🖥️ Computers & Telecom-2.0
👷 Construction-5.7

*Percentage point changes 2021- 2022.

Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.

Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.

In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.

What to Watch: Corporate Margins in Perspective

One salient feature of the current market environment is that corporate profit margins have approached historic highs.

Recession Risk: Corporate Margins Near Record Levels

As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.

According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.

Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.

Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.

Sector Fundamentals Looking Ahead

How are corporate metrics looking in 2023?

In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.

Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.

For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.

S&P 500 SectorPercent of Companies With Revenues Above Estimates (Q1 2023)
Health Care90%
Utilities88%
Consumer Discretionary81%
Real Estate
81%
Information Technology78%
Industrials78%
Consumer Staples74%
Energy70%
Financials65%
Communication Services58%
Materials31%

Source: Factset

Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.

Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.

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