As it is the end of the decade, many financial news and mainstream news outlets are taking the time to look back on the past decade of stock market returns which have indeed been impressive.

Hopefully you followed sound advice on staying invested and dollar cost averaging. Despite the “sky is falling” hype of many market commentators post crisis, the S&P 500 has had its best decade for returns since the 1950’s. That’s right, if you weren’t invested, you missed out on what is potentially a once in a 70 year opportunity. Hopefully also, you didn’t try to invest it all in one stock to beat the market. Think you were smart because you invested in Netflix 10 years ago? Well you didn’t pick the best performing stock, that title goes to Patrick Industries which makes parts for RV’s, manufactured housing and marine industries. Picking one stock to beat the market over the long term is really hard. The easiest thing is to just pick the whole market and let itself pick out the winners. This is why for most people’s primary investments I recommend index funds.

Now the flip side of the period of outperformance from 2010 to 2019 is that the period from 2000 to 2009 was one of the worst decades for investing in stocks in the US ever. I can’t speak for individual stocks but for entire markets, research has shown that underperforming sectors for a decade tend to outperform in the next decade. This was certainly the case for the Nasdaq. Post the tech bubble, the Nasdaq lost about half its value from the period from 2000 to 2009. Since then it has gained over 400%. So there is something to be said for long term investors that would like to tweak their allocations a bit towards those sectors that have underperformed in the last decade to position themselves for an uptick. It’s one reason I have been touting emerging markets in some of my most recent posts. It’s human nature to be scarred from past trauma and backwards looking, it’s one reason we see these 10 year cycles. Right now everyone is focused on the tech sector and chasing returns of the 2010’s, this is usually a losing strategy. What may be a better strategy is to look at the underperforming sectors of the past 10 years and see where returns may be overdue. These 10 year cycles are also one reason that so many commentators and portfolio managers are so downbeat on returns in US stocks for the next 10 years. Many don’t expect these returns to be repeated again.

There is a bright spot though which is worth qualifying. The pros are negative on US stocks over the next decade but many are perking up to the potential in emerging and international stocks. With that in mind, I am going to take a look at some sectors that have underperformed for the past 10 years which I think may have a chance of beating the S&P over the next 10 years.

My Picks

Europe – Negative rates, graying demographics, behind in the tech race, strikes and increasingly, a back seat to global politics, Europe has its problems and its doubters. All that is before we even get into Brexit. Still, ETF’s like the Vanguard FTSE Europe (VGK) hold world class companies that aren’t going anywhere. Nestle, Roche, Siemens, LVMH and Diageo are just a few of the companies that make up this index and offer instantly recognizable brands and products. The index has returned about 5% annually over the past 10 years. There are a number of reasons for this which include the sovereign debt crises, aging of the workforce and the weakening Euro versus the dollar but there are reasons to be optimistic. The dividend yield is 3.37% on the Europe index while that of the S&P is 1.75%. In addition the S&P has become increasing tech heavy with a 26% weighting in the sector, which increases the US markets vulnerability were something to go wrong in tech. Particular markets within Europe have growth stories, Greece is quietly up 45% this year and who do you think the nouveau rich will want to buy in emerging markets? Chances are Louis Vuitton will still be in demand.

Emerging Markets – I remain bullish on emerging markets. This is more than just the trade deal. Emerging markets were the darling investments of the 90’s and early 2000’s before the crisis. The MSCI Emerging Markets Index has returned about 3% annually for the past 10 years, grossly underperforming the US and the developed world markets. Slower growth in China as well as widespread gaft in many countries has contributed to recessions in this countries and falling share prices. The lack of growth in the rest of the world has has helped draw dollars back to the US, weakening many emerging market currencies versus the dollar. Rather than an issue this represents an opportunity for investors. This means shares are on sale in dollar terms. A slowdown which produces lower rates in the US could set off a hunt for yield that will once again make emerging markets attractive. Higher yields coupled with cheaper stocks will eventually be attractive enough to entice investors and you will then see currencies appreciate. This is what happened in emerging markets from 2003 to 2007 when returns averaged 30% annually. This is also why I like emerging market bonds over the next decade. ETF’s like EMB capture sovereign debt of emerging countries in US dollars, which will be much easier to repay if their currencies appreciate.

There is even a case to be made that the corruption investigations were a good thing. They increased long term transparency and market fairness to these places which sets the groundwork for growth in the long run despite the short term pain. You can see this in the attempts to reverse state capture in South Africa as well as the cleaning house that took place in much of Latin America post the lava jato scandal.

Energy – Bear with me here as I make the case for this one. We may be finally looking at a situation where people are starting to shift away from fossil fuels and wake up to the effects of the changing climate. This also represent opportunities for investors. Renewables will start to become more important and they will still generate income for those companies able to harness them. Significant investment and infrastructure will be required for green power which means it will need backing from public markets. Even oil will have a place, besides just burning it, petroleum is the base source for thousands of different products from plastics to lubricants. Saudi Aramco, which just went public, is making a bet that it will be the last oil producer standing no matter the shifts in the global economy. Investors stand to benefit.

The emerging middle class in developing countries is also going to require huge energy to meet its demand, something that is just getting started. Apple may have a bigger market cap than the US energy market right now, but it doesn’t mean the need for electricity in much of the world is going to go away or shrink any time soon.

Medium and Long Term USD Bonds – Many have speculated that the 30 year bull market in bonds may be over. We have been on a long path downward in terms of rates since the high inflation days of the 70’s. High rates in the late 70’s and early 80’s broke the back of inflation and the predictable inflation rate since then has allowed the Fed to steadily chip away at rates to spur growth. Although we may be nearing the end of this long structural cycle, I think we may not be at the very end yet. A downturn in the US could quickly send short term rates back down to 0.0% like the Fed did during the crisis. The search for safety coupled with baby boomers continuing to retire could potentially push the further end of the yield curve to 0 or even negative in the US. This means there is still room for price appreciation in 10, 20 and 30 year debt in US dollars. Don’t believe it can happen? Even Greece is issuing negative debt now after having been one of the highest yielding and highest risk sovereign investments in the world a few years ago. We may be surprised to see where the market takes things.

Conclusion

I agree with those that say we shouldn’t expect to see growth in US stocks for the next 10 years like we have seen in the past 10. The law of averages dictate we that we are likely to come back down from the clouds. It doesn’t have to be all gloom and doom though, as I have pointed out in these particular markets, there are some sectors which have had a rough decade and are worth a second look from investors. Hopefully 2029 me will not be looking back on this post shaking my head.

The information provided by www.cashchronicles.com is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. www.cashchronicles.com does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any tax or investment decision without first consulting his or her own financial advisor or accountant and conducting his or her own research and due diligence. To the maximum extent permitted by law, www.cashchronicles.com disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.