With globalisation causing the major economies of the world to become more integrated, it follows that most investors believe stock markets move in unison. For example, if the US S&P 500 rises by 10% then the FTSE 100 and other developed nations should see their main indices rise by a similar amount.
However, that is not the case. For example, over the last ten years the S&P 500 has risen by 55%, which works out as an annualised rate of 4.5%. This is a very impressive performance given that the period has included the global financial crisis, which caused the S&P 500 to fall by 56%. Since then, though, it has recovered strongly to reach all-time highs before a pullback during the course of 2015.
Meanwhile, Germany’s DAX index has risen by significantly more than the S&P 500 during the last ten years. It is up a whopping 125% during the period, which works out as an annualised growth rate of 8.4%. This is particularly strong performance given that the Eurozone economy has performed relatively poorly since the start of the credit crunch, with the ECB’s unwillingness to slash interest rates and stimulate the single-currency region through quantitative easing causing economic growth rates to remain poor. But, with a booming export sector, it seems as though Germany’s major companies have performed exceptionally well.
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However, the FTSE 100 has been a major disappointment in the last decade. It is up a measly 12% since October 2005, which is less than two year’s annualised performance by its German rival during the same time period. This shows that stock markets across the developed world are not as highly correlated as many investors believe them to be and, looking ahead, the FTSE 100 could continue to underperform its US and German peers.
A key reason for this is that the FTSE 100 is dominated by resources companies. Even after the share prices of a number of major oil and gas and mining companies have fallen by up to 50%, they still account for 17.3% of the index. This compares to just 9.7% in the S&P 500, while the DAX includes no mining companies and no pure play energy businesses. And, with commodity prices seemingly likely to come under further pressure in 2016 and beyond as Chinese demand for iron ore, oil and other commodities levels off, the FTSE 100 could be held back by poor performance from what are still dominant sectors.
Furthermore, Germany may be viewed as a more appealing place to invest as a result of its turnaround potential. As mentioned, the Eurozone has endured a challenging period and, with the ECB now engaged in a major quantitative easing programme, the continent’s largest economy could stand to benefit. And, with the US economy due to grow by over 3% in 2015 and in 2016, it may hold more appeal than the UK, which is expected to grow by 2.3% and 2.7% in the same years.
So, while the FTSE 100 is undoubtedly a great place to invest for the long term, it would be unsurprising for its US and German peers in particular to continue their outperformance in the coming years.
