North American stocks lead world in risk-adjusted returns
North American stocks posted the best risk-adjusted returns in the past three years as stimulus from the Federal Reserve helped spur profit growth and investors sought a haven in the world's largest equity market.
The MSCI North America Index of 702 companies has rallied 2 percent since the end of 2009, after taking into account price swings, the most among 19 regional and global equity benchmarks, according to the Bloomberg Riskless Return Ranking. Volatility in the U.S. and Canada declined by 38 percent from the previous three years as equities recovered from the worst bear market since the Great Depression.
North American stocks have provided more stable returns as Europe's debt crisis and inflation concerns in emerging markets prompted investors to seek safety in U.S. corporations. Fed Chairman Ben S. Bernanke's focus on lowering the unemployment rate has helped speed the U.S. recovery, as the central bank took unprecedented measures to stimulate growth before its counterparts in other regions.
"When we fell off the edge in '09, our policymakers didn't hesitate in turning on the monetary spigots to full," Paul Attwood, who helps oversee $14.7 billion at Huntington Asset Advisors in Cincinnati, said by telephone. "European counterparts were hesitant to do the same," he said. "In the emerging markets, they were tightening policy up until about 12 months ago. That's not an equity-friendly environment."
The risk-adjusted return, which isn't annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, and gives a measure of performance per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
U.S. stocks led by Apple Inc., Exxon Mobil Corp. and General Electric Co. make up about 91 percent of the MSCI North America Index, with Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia representing the biggest Canadian companies in the gauge.
The MSCI World Index, which tracks stocks across all 24 developed market countries, had the second-biggest risk-adjusted return since the end of 2009, climbing 1.4 percent. The MSCI BRIC Index was the worst-performing measure out of 19, falling 0.6 percent after taking into account price fluctuations. The index lost 12 percent of its value before adjusting for a volatility that was higher than that of North America's.
Slowing economic growth in 2007 coupled with a slump in the U.S. housing market pushed the Fed to embrace easy monetary policy faster than other central banks. Bernanke has left the Fed's benchmark rate in a range of zero to 0.25 percent since December 2008 and the Fed's dual mandate of price stability and maximum employment has prompted the U.S. central bank to conduct record bond purchases. The Bank of Canada dropped its target rate to as low as 0.25 percent in 2009 and has left it at 1 percent since September 2010.
The European Central Bank did not begin cutting its benchmark rate until October 2008. ECB President Mario Draghi has lowered the rate three times to 0.75 percent since assuming office November last year. European growth has been further crimped by German Chancellor Angela Merkel's austerity-first policy toward indebted euro nations in exchange for rescue funds.
The threat of inflation prevented emerging-market central bankers from keeping interest rates at lows. The People's Bank of China began reducing rates in September 2008 and raised them from 2010 through July last year. Since then, China's central bank has cut its benchmark rate twice this year to 6 percent.