Who's Smiling Now?

Oh yeah! So what's unhealthy about a 34 per cent gain since early March - close to an annual rate of 60 per cent?

That's how the index that measures much-maligned international shares has performed. And it doesn't include dividends.

Sorry, mate, but it makes house prices, which grew 14 per cent in the year to June, look like snails.

So why haven't we heard more about the world share rally?

Probably partly because everyone's a bit wary around international shares. Their plunge in value from March 2000 to March 2003 was the second worst since 1900.The only bigger drop came after the 1929 Wall Street Crash.

There were, of course, times during the recent three years when the world share index, the MSCI, rose, but not for long. So when it headed upwards last March, market watchers waited a while before calling it a rally.

By now, though, the index has regained a third of what it lost, in pretty short order.

True, many New Zealand investors in world share funds haven't seen such a big rise.

That's because our dollar has risen against most other currencies, reducing the value of international investments in share funds that aren't hedged.

But even in unhedged investments, international share price gains have much more than offset foreign exchange losses.

It's important to note that I'm not saying the rally will necessarily continue.

You can never be sure of that - either in the share or property market. But it would be really surprising to see further major losses in world shares in the next little while.

Nor am I saying that we should rush out and put all our savings into international share funds.

My message is more of an acknowledgement to those of you who have stuck with your investments in world shares, or in funds partly invested in them, through the bad times.

Your patience may at last be paying off.

You no longer need to cringe around people bragging about huge gains on their property investments. It's quite likely that you've done better than they have since March.

Given that I've received a bit of flack in the last couple of years for recommending international shares as a long-term investment, I feel justified in pointing to an Investor column I wrote almost a year ago.

In it, I quoted Martin Allison of JB Were, who looked at the big US bear markets of last century and the rallies that followed them.

Returns in the single year after each trough ranged from 7 per cent to 162 per cent, after inflation. The average was an impressive 45 per cent.

The trouble is that nobody knows in advance when a rally will start. The only way to be sure you won't miss the upturn is to stay invested through the downturn.

As Allison said, "When the future is again clear, the bargains will no longer be available."

Don't let that be too discouraging, though, if you did bail out of world shares, and want to get back in.

Allison also found that in the decade following each trough, returns ranged from 7 to 16 per cent a year, averaging 12 per cent - and that's after inflation.

Who knows? It may happen again. World shares certainly look more promising than they did when I wrote the year-ago column.