It’s that time of the year again when investors take a step back and fantasize about the voluptuous returns they might have enjoyed, had they the prescience to buy some asset class or another. Here are some of the best bets that you might have made in 2013.
Nobody has really cared about the Japanese stock market since the early 1990s, when it plummeted along with the country’s own banking and real estate collapse. For the next 20 years or so, the market showed very few signs of significant recovery. Until now.
It became clear in late 2012 that Shinzo Abe was likely to take over as prime minister with a mandate to jolt Japan back into growth. That push toward growth was widely expected to include a bit of Ben Bernanke-style quantitative easing, which has been credited with sending the US stock market on a near-relentless climb since the worst of the Great Recession.
With that in mind, investors around the world have poured into Japanese equities. The benchmark Nikkei 225 is up more than 50% in 2013, handily trouncing the gains of the broad global equity index known as the MSCI World index. (The Tokyo Stock Exchange Topix index is also up about 46%.)
Yes, the country is still mired in one of the world’s worst recessions since World War II (and possibly before it.) And yes, more than one-fifth of the Greek economy has been effectively destroyed. And yes unemployment is currently hovering around 27%. But for the eternal optimists of the financial markets, 2013 was the year to buy anything Greek.
Greek government bonds, which were the last place anybody wanted to be a couple years ago, have earned an investor more than 50% so far this year, as it became less likely that Greece would actually exit the euro zone. (That’s including coupon payments and capital appreciation, according to the Bank of America Merrill Lynch Greek Government bond index.) Meanwhile, the Greek stock market is up more than 30% as measured by the Athex Composite index.
Netflix became the new Apple in 2013, a beloved consumer stock that only seemed to go up. Unless something goes horribly wrong, it will end up as the best performing issue of the S&P 500, rising 293% compared to the broader index, which rose a tremendous 25% itself.
Exactly what was it that supercharged investor excitement about the shares? The widespread popularity of original programming such as House of Cards, which got a lot of people to sign up for the service, seemed to help. (A subset of those subscribers doubtless figured that if they themselves were willing to pony up for a video-streaming subscription, others might be too. A lightbulb went off and they decided to buy shares.) Here’s an annotated look at the stock over the year.
Once a government bails out a bank, it usually doesn’t let it fail. That government imprimatur takes away a lot of the risk related to owning the bank’s stock. And that’s why betting on bailed-out banks is a long-cherished tradition of investors. (Go back and look at how hard US banks rallied in 2009 and 2010 after nearly collapsing in 2008.) The same strategy worked especially well in Ireland this year. The nation’s real-estate mania and banking bust left the country staggering under high unemployment and a mountain of bad debts. Even so, owning the the surviving Irish financial institutions—which only managed to survive the crisis because they were taken under the wing of the government—was a winner this year. For example, Bank of Ireland—which is 15% owned by the Irish government and collapsed into a penny stock in the crisis—is up 138%.
It was yet another great year for US stocks. The equity market climbed to all-time highs thanks in part to a the Federal Reserve’s ongoing effort to support economic growth by pushing money into the financial system. Almost everything rose too. The S&P is up 25% through Wednesday, besting the Dow which rose 20%. Small caps did even better, with the Russell 2000 index of small capitalization stocks rising 35%. The markets did have something of a soft patch through the summer and early fall, when the Obama administration was toying with nominating someone besides Janet Yellen—a vocal supporter of Fed policies that many credit with keeping markets buoyant. But US stocks shot sharply higher once Yellen did get the nod.
Generally speaking, it wasn’t a great year for government bonds, usually thought to be the safest kinds of investments. Investors have huddled in this area of the financial markets for years, waiting out the worst of the global financial crisis. This year, with signs of stabilization in the US and Europe, money finally started coming out of the bond markets broadly, pushing prices of safer assets down. But some government bond markets had a great year, notably Spain. Is that because Spain is showing signs of economic recovery?
Hah! No, it has more to do with the fact that interest rates on Spanish government bonds plummeted as it became clear that the European central bank would continue to keep the European banking system supplied with enough cash to prevent a collapse. (Such a collapse would likely mean Spain would have to bail out its banking system. It didn’t have the money to do that, and would have likely had to stiff some creditors as a result.) When interest rates fall, bond prices rise. And Spanish bonds generated a return of around 12% for investors this year, compared to less than 3% for the broader Euro-area government bond market.
The Israeli currency is one of the world’s best performing against the US dollar this year, rising roughly 6% against the greenback. Thanks to Israel’s buoyant economy, the Bank of Israel has kept interest rates relatively high compared to countries like Japan and the US. Those interest rate differentials act as a magnet in financial markets, pulling capital into investments denominated in higher-yielding currencies. Sturdy demand for high-tech exports from Israel—foreign buyers must pay for Israeli goods in Israeli money—has also kept keep the shekel strong. Betting on continued appreciation could be risky, however. As the Bank of Israel has intervened in the financial markets on multiple occasions in 2013 to try to weaken the currency, as a strong currency tends to make exports more expensive for foreign buyers.