The tortoise and the hare?

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12 September 2018

Everyone knows Aesop’s fable of the hare and the tortoise – where the fleet but flighty hare is defeated by the slow and steady tortoise – but could global stock markets echo the animal kingdom?

Ask anyone what is the biggest stock market in the world and most will answer correctly – the United States of America. But how many realise that Japan has just overtaken China as the second largest stock market? (If you are wondering, the UK is fifth, behind Hong Kong and ahead of France).

Since China first leap-frogged past Japan in 2014 it has truly been a case of the hare and the tortoise. China quickly raced to double the size of the Japanese market, before collapsing and letting the tortoise catch up.

A similar pattern occurred recently. China sprinted to an $8 trillion market value in January, only to fall back again, letting the slow but steady Japanese market once more catch up and overtake its more volatile neighbour.

Of course size is not everything, and what really matters is returns for shareholders. From this perspective the contest between the hare and the tortoise is not even close – the tortoise wins hands down. Since the start of 2013 the Tokyo stock market has returned about 120%, compared to 30% from China, despite China’s economy growing at a hare-like 7% a year, compared to Japan’s meagre 1%*.

So what is the moral of our modern-day fable of two stock markets? Firstly, for investors, economic growth is not everything and, secondly, given time, investing in ‘tortoises’ can beat backing the ‘hares’. So it should come as no surprise that at Ruffer, where we believe that long term performance is primarily driven by capital preservation, we have significantly more exposure to tortoise-like markets like Japan, than to faster growing, but volatile, hares such as China and other emerging markets.

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The tortoise and the hare?