Given the deterioration in the global economic outlook one might have expected safe, low risk assets to have done well at the expense of riskier ones such as equities and corporate bonds this year. Yet exactly the opposite has occurred.
Global equity markets have returned 11% this year compared to a virtually flat return from government bonds. Lower quality debt issued by companies, so-called junk bonds, have also delivered strong returns. UK junk bonds have returned 21% this year, more than twice that on the top rated corporate bonds.
So how can we explain the apparent paradox of such strong returns to risk assets in what remains an uncertain world?
Low or no returns on low risk assets such as cash, government bonds and gold, have probably pushed some investors into higher yielding, riskier assets. We've often heard the argument that it's better to invest in solid, well capitalised companies than highly indebted governments. And underlying this year's rally in risk assets seems to be a belief that policymakers will, eventually, do whatever it takes to sort out the euro crisis. It is striking that the big bounce in equities kicked off in June after the EU announced its bailout of Spanish banks.
But taking as a starting point the beginning of the global financial crisis in 2007, this year's rally in risk assets looks an aberration. Low-risk assets such as bonds have been the big beneficiaries of the uncertainty and economic weakness. Since 2007 US government bonds have given a 40% return against a 15% return on US equities.
Other, supposedly safe assets, such as gold and the Japanese yen, have also benefitted from the uncertainty of recent years. A UK investor who bought yen in 2007 would have made a return of 87%. Gold has yielded a return of 158% over the last five years making it the best performing major asset class.
Over the last five years, investors have also ploughed money into 'real assets' such as commodities. More recently agricultural commodities have risen in value driven by shortages caused by droughts in the US Midwest and, last year, in Russia. This month the price of corn reached an all-time high, having risen 127% since 2007.
Yet what stands out is how quickly market views change. Witness the poor performance of gold this year or the seesaw performance of emerging market equities: down 54% in 2008, up over 100% in 2009-10, down 19% last year. As retail investors are often reminded, past investment performance provides no guide to future performance.