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New research from Credit Suisse and London Business School in the Credit Suisse Global Investment Returns Yearbook 2013
Based on 113 years of international evidence, the Credit Suisse Global Investment Returns Yearbook examines how stocks and bonds might perform in a world witnessing a resurgence of risk appetite and concerns about inflation.The Credit Suisse Global Investment Returns Yearbook and Sourcebook are published by the Credit Suisse Research Institute in collaboration with London Business School authors Elroy Dimson, Paul Marsh and Mike Staunton. The 2013 Yearbook examines the post-crisis investment landscape, asking what rates of return investors should now expect from equities, bonds and cash, and investigates the evidence for mean reversion in equity and bond prices. The 2013 Sourcebook provides a full update on investment performance since 1900 in all the main asset categories, and on risk and style premiums in global markets. Both books are published today.
Giles Keating, Head of Research for Private Banking and Wealth Management at Credit Suisse, said: “The Yearbook uses well over 100 years of data to show just how exceptional the current negative real yields on fixed income assets are. This causes stress for savers – but it also makes equities look much more attractive than bonds.”
Stefano Natella, Head of Global Equity Research at Credit Suisse, said: “The Yearbook has a strong track record of identifying important issues for investment strategy, and of drawing out guidance for investors leveraging a proprietary set of long historical data. This year’s publication with its focus on mean-reversion provides timely insights for long-term investors.”
The Yearbook comprises three articles, together with profiles of 22 national and 3 regional markets. It covers the five main asset classes, with an annual dataset that runs from 1900 to the present day. The 2013 Yearbook incorporates three new countries, Austria, China, and Russia. The inclusion of Russia and China, where investors lost everything in 1917 and 1949, respectively, allows the authors to explore the impact of survivorship bias, and to estimate the long-run, historical, worldwide equity risk premium on a survivorship-free basis.
The low-return world: The first paper in the 2013 Yearbook examines the new investment landscape. Yields on sovereign bonds in safe-haven countries have fallen to historic lows. This has prolonged the bull market in bonds, but prospective real yields in many countries are now negative, or very low. Meanwhile, since 2000, equity returns in developed markets have been disappointing. The Yearbook assesses what rates of return investors should now expect from equities, bonds, and cash. In brief, the authors fear that investors’ expectations of asset returns could prove too optimistic.
Mean-reversion: The Yearbook’s second paper addresses the claim that equity returns revert to the mean. Such behaviour would not only reduce risk, but could also provide market-timing signals to help boost investors’ returns. The Yearbook examines the evidence for mean reversion, and whether investors can exploit it. They find support for higher returns when asset prices are low relative to fundamentals. However, markets can take a long time to revert, sometimes moving even further from historical norms, while in other cases, they may never revert. The market timing signals provided by mean reversion are noisy and often fallible. Basing investment strategies upon them can give lower, not higher, returns.
Inflation and equities: With his colleagues from the Global Equity Strategy Team at Credit Suisse, Andrew Garthwaite draws on prior Yearbook research on inflation and asset returns in the report’s third article. In the context of modest inflation with rising inflation expectations, there is scope for equity multiples to re-rate higher. As the global business cycle begins to move toward a firmer recovery, this is important for investment strategy. The authors see conditions that could drive a reversal in fund flows from bonds into equities.
Now extended to include 22 countries, the Sourcebook examines risk over the long run and the historical extremes of investment performance. It documents the global long-term and shorter-term rewards for equity and bond investing, and presents the detailed 113-year dataset that provides the background for the Credit Suisse Global Investment Returns Yearbook.
The Sourcebook reports that, notwithstanding their recent rally, equities have mostly disappointed since the beginning of 2000. However, over the long run, they have beaten inflation, bonds and cash in every country with a continuous 113-year history. The Sourcebook reports a size premium (the amount by which smaller companies outperform larger ones) that has been positive over long intervals and many countries; a value premium (the amount by which value stocks outperform growth stocks) that has been larger than the size premium; an income premium (the amount by which high-yielding stocks outperform low-yielding stocks) that has been larger than the value premium; and a momentum premium (the amount by which past winners outperform past losers) that is largest of all.