The Global Investment Returns project represents a continuing study of long-run asset returns on stocks, bonds, bills, inflation, currencies and GDP since 1900. It spans 23 countries, covering over 98 per cent of global stock market capitalisation in 1900. Led by Professor Elroy Dimson (University of Cambridge), Professor Paul Marsh (London Business School) and Dr Mike Staunton (London Business School), the dataset is updated, extended and analysed annually and has become a reference work for investors worldwide. This dataset underpins a worldwide assessment of the magnitude of the equity and bond risk premia, and is used to research many different questions relevant to investment, finance and regulation.
A Yearbook has been published annually as part of the Global investment Returns Project. In 2017 this was prepared for the ninth time by the Credit Suisse Research Institute, in collaboration with Professor Elroy Dimson, Professor Paul Marsh, and Dr Mike Staunton. Each year the Global Investment Returns Yearbook draws from this detailed and complete dataset stretching back 117 years to examine a set of key investment themes.
Please read through the different year tabs to explore the key themes and questions analysed.
Uninterrupted dominance of the US equity market
Between 1900 and 2000, equities were by far the highest-performing asset class compared to bonds or money market papers. On a global basis, shareholders achieved an annual return of 5.1%. The risk-free money market, in contrast, generated 0.8% per year while bonds generated 1.8%. These are real revenues, meaning they have been adjusted for inflation.
A very different picture is shown by the period from 2000 to 2016, which saw three equity market crashes and a dramatic fall in interest rates: Equities returned 1.9% per year, while the money market came in below zero at -0.5% per year. Investors who invested in bonds, by contrast, achieved an annual return of 4.8%.
Investors experienced the best of all worlds in the 20 years preceding the millennium change. From 1980 to 1999, the return level for all asset classes was higher than before and afterwards. Equities earned 10.6% per year, bonds earned 6.6%, and money market papers still earned 2.8%.
Time for equities?
Until one year ago, there was a search for investment ideas that were most likely to be successful in a deflationary environment. In the meantime, the political environment has changed and, therefore, so has the investment themes. Deflation fears have been replaced by the expectation of a return of slightly rising prices. The question is no longer whether and to what extent government bond returns can fall. Rather, the question is whether we have arrived at the end of the 30 year Bull Run in the bond market and thus whether the below average performance of equities compared to bonds is over.
Mild inflation is favourable for equities
Equity investors don’t need to worry about a slight rise in inflation. First, corporate earnings and dividends are rising in tandem with prices in general. Second, history shows that the transition from a slightly deflationary environment – as has prevailed over most of the past decade – to one of mild inflation constitutes a favourable backdrop for equities. This would speak in favour of the long overdue reallocation of assets from bonds to equities.
Decrease of risk premium
However, equity risk premiums are likely to be lower in the future. The risk premium is the additional return that shareholders receive for accepting a greater degree of risk than investors in the money market. Since real interest rates remain at low levels, this is likely to depress returns on all asset classes – including equities. Given that equity investors made a 4.2 percentage point higher return than money market investors in the 1900–2016 period, the authors predict an additional return of just 3 to 3.5% in the years ahead.
The conclusion reached by the 2017 Yearbook is that the risk premiums on equities are unlikely to be as high in the future as they have been. From the vast amounts of data, interesting observations can be made and some conclusions can be drawn as to the further development of the various asset classes.
In the 2016 Yearbook, Professors Elroy Dimson and Paul Marsh and Dr Mike Staunton examine two issues: first, the reaction of financial markets to interest-rate rises and cuts; second, the investment performance of trading strategies over interest-rate hiking and easing cycles.
Does hiking damage your wealth?
Based on more than a century of evidence on US interest rates (85 years for the UK) it is clear that announcement-day impacts are typically small, especially for well-signalled policy moves. Nevertheless, rate rises are on average bad news for equity and bond investors. In an analysis of annual data covering 21 countries over the period 1900–2015, the authors find that real equity and bond returns tend to be higher in the year following rate falls than in the year after rate rises.
Cycling for the good of your wealth
Across a broad set of asset classes – including equities, bonds, currencies, real estate, precious metals and collectibles – the findings point to substantial differences between returns during hiking and easing cycles. Historically, no asset class has offered contracyclical returns in relation to interest-rate changes. Smart beta is attracting a lot of attention at present, and the study reports that the rewards from such strategies tend to shrink when interest rates are rising.
Paul Marsh, Emeritus Professor of Finance at London Business School, comments: “The equity risk premium is the return on equities in excess of the return on cash. In the USA, the risk premium during periods of tightening interest rates was just 1.8% per annum, compared with 8.8% per annum. during periods when rates were falling. In the UK, the entire equity premium was earned during loosening periods, and investors would have been better off being out of the equity market while interest rates were rising.“
Dimson, E., Marsh, P. and Staunton, M. (2017) “Factor-based investing: the long-term evidence” Journal of Portfolio Management, Special Issues.