Exploring The Resilience of Developed Markets and The Challenges of Foreign Bonds

Introduction: A Year of Divergence in Global Asset Performance

In the ever-evolving landscape of global finance, 2024 has proven to be a year of significant contrasts. As we navigate through its third quarter, it's clear that the performance of major asset classes has diverged, creating both opportunities and pitfalls for the sophisticated investor. While developed markets have delivered robust returns, certain segments, particularly in the bond market, have struggled. This report delves into the performance of these asset classes, offering insights that can help you strategically position your portfolio for the remainder of the year.

Key Takeaways:

  • Developed-markets stocks excluding the US have surged by 11.0%, making them one of the top performers in 2024.
  • Foreign inflation-indexed bonds have been the worst performers, with a 1.7% loss year-to-date.
  • US real estate investment trusts (REITs) have led global markets for two consecutive months, with the Vanguard Real Estate ETF as the standout performer.

The Triumph of Developed Markets Ex-US

A Surge in Global Equities

Global equity markets have seen varying degrees of success in 2024, but one of the most notable performers has been developed markets outside the United States. According to recent data, these markets have risen by an impressive 11.0%, making them the second-best performing asset class of the year. This performance underscores the resilience of economies such as those in Europe and East Asia, which have benefited from strong corporate earnings, favorable monetary policies, and a weakening dollar.

"The second-best performance for 2024: developed-markets stocks ex-US via an 11.0% rise." — TalkMarkets

This growth raises important considerations for investors. The continued strength of these markets may suggest a strategic opportunity to increase exposure to international equities, particularly in regions that are benefiting from post-pandemic recoveries and geopolitical stability.

The Struggles of Foreign Bonds

A Year to Forget for Inflation-Indexed Bonds

While equities in developed markets have excelled, the same cannot be said for foreign bonds, particularly inflation-indexed ones. These bonds have recorded a 1.7% loss year-to-date, making them the poorest performing asset class in 2024. This underperformance can be attributed to several factors, including rising interest rates in key global markets and a general shift away from fixed-income securities as investors seek higher returns elsewhere.

"Only two of the major asset classes are nursing year-to-date losses: foreign-developed markets ex-US bonds and foreign inflation-indexed bonds — the latter is the worst performer this year with a 1.7% setback." — Capital Spectator

For high-net-worth individuals, this presents both a challenge and an opportunity. While these bonds may not be the most attractive investment currently, they could offer value in a diversified portfolio, particularly if global inflation pressures begin to ease.

The Resilience of US Real Estate

REITs Lead the Charge

Amidst the varying fortunes of global asset classes, US Real Estate Investment Trusts (REITs) have emerged as a consistent performer. For the second consecutive month, REITs have led the global markets, buoyed by strong demand in the real estate sector and a favorable interest rate environment. The Vanguard Real Estate ETF has been highlighted as the best-performing asset within this category.

"US real estate investment trusts led global markets higher for a second straight month in August, based on a set of ETFs representing the major asset classes." — Seeking Alpha

For investors seeking stable income with potential for growth, REITs offer an appealing option. The consistent performance of these assets in 2024 suggests they could continue to deliver value, particularly if interest rates remain relatively low.

Final Insights: Strategic Asset Allocation in 2024

As we look towards the final quarter of 2024, the performance of major asset classes offers critical insights for strategic asset allocation. Developed markets ex-US equities have demonstrated robust growth, making them a potential focal point for those looking to enhance their international exposure. Conversely, the challenges faced by foreign bonds, particularly inflation-indexed ones, highlight the importance of diversification and caution in fixed-income investments. Meanwhile, the resilience of US REITs underscores their role as a reliable income-generating asset in a balanced portfolio.

Key Insight:

Diversification is key. While developed markets ex-US equities have shown promise, it's essential to balance this with exposure to other asset classes, including those that might currently be underperforming but could rebound as market conditions evolve.