Why is the US so fortunate?
Public Domain. Source: NASA
When you look at global stock market returns, the US stands out. Over the past 10 years, money invested in the US has grown almost 150%, while global investments are up by half that much. That’s a significant difference for any investor. This isn’t just a recent thing. Since 1900, a dollar invested in the US grew to $1,400 after inflation. In the UK, it only grew to $500. The countries with the best real returns around the world have been, in order, South Africa, Australia, and the US. Why have these countries stood out?
Source: Credit Suisse
What do the top-performing equity markets have in common? First, they’re remote. The world may be getting smaller now, but these three markets are separated from other major markets by thousands of miles of oceans. That means they’ve been relatively unaffected, directly, by major wars and conflicts. The last war that touched the territory of these three nations was the Boer War in South Africa in 1900. Even the overthrow of the apartheid regime in South Africa was accomplished relatively peacefully. It wasn’t a major civil war.
Second, they have strong traditions of property rights, accountability, and the rule of law. The come from the English legal tradition of representative politics and limited governmental authority. The government and the courts are independent. The courts have generally upheld the rights of property owners, and the government has respected those legal decisions.
Finally, these three nations have been rich in many critical resources – energy, minerals, capital, and labor. Their remote locations have not held them back from economic development because they have natural resources, human resources, and have been a destination for investment capital for several centuries. In short, they’ve been attractive places for investors to capital to work, and their courts have respected the rights of those investors to enjoy their investment returns. And they’ve done this, over a long period, without being attacked by a foreign power.
Will these natural advantages continue to support superior real returns? They have so far, especially in the US. But the nature of the economy is changing. Nations are more closely tied to one another by trade relations and global capital flows. And information – and computer viruses – move across borders with few limitations. Still, the legal and capital structures matter, as do natural and human resources. Over time, it’s reasonable to expect the freest markets to have the best real long-term returns.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”