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New research from Credit Suisse and London Business School in the Credit Suisse Global Investment Returns Yearbook 2014
International evidence from 1900-2014 provides new insights on investing in emerging markets and growth economies.The Credit Suisse Global Investment Returns Yearbook and Credit Suisse Global Investment Returns Sourcebook are published today. The authors are Elroy Dimson, Paul Marsh, and Mike Staunton of London Business School.
Published by the Credit Suisse Research Institute in collaboration with London Business School, the 2014 Yearbook examines the investment performance of emerging markets over the last 114 years, and explores trading strategies in the emerging world. It revisits the authors’ finding, in their widely-cited book Triumph of the Optimists, that stock returns fail to reflect economic growth, and presents new evidence and explanations for this puzzle.
The 2014 Sourcebook reports the latest risk premium estimates for international stock and bond markets, and the performance to end-2013 from style factors such as size, value and growth, income, and momentum.
Giles Keating, Head of Research and Deputy Global CIO for Private Banking and Wealth Management at Credit Suisse, said: “The recovery in developed world economies now appears to be well under way. However, there are concerns that some emerging countries will confront a more challenging future. In this context, the Credit Suisse Global Investment Returns Yearbook 2014 examines the relationship between GDP growth, stock returns and the long-run performance of emerging markets.”
Stefano Natella, Head of Global Securities Research for Investment Banking at Credit Suisse, said: “At a time when investors are confronted by the prevailing volatility in capital markets, particularly emerging markets, the data in the Yearbook, now stretching back 114 years and spanning 23 countries, provides investors a unique perspective with which to make informed asset allocation decisions.”
The Yearbook comprises three articles, together with profiles of 23 national and three regional markets. It covers the five main asset classes, with an annual dataset that runs from 1900 to the present day. The 2014 Yearbook incorporates four countries that entered the study for the first time in 2013–14: Austria, Portugal, China, and Russia. The inclusion of China and Russia, where investors lost everything through state expropriation, allows the authors to explore the impact of survivorship bias, and to estimate the long-run, worldwide equity risk premium on a survivorship-free basis.
Emerging markets revisited: After exceptional performance during the first decade of the 21st century, emerging market equities have recently suffered setbacks. The first article in the 2014 Yearbook presents an evidence-based view of the performance of emerging markets. The authors estimate the longest possible record of emerging market performance, covering stock market history since 1900. They find that the long-term (114-year) equity risk premium for a US investor in emerging markets was 3.4%, as compared to 4.3% for developed markets. However, this underperformance can be traced back to the distant 1940s, and the authors expect superior returns in the future, in line with the higher risk of emerging markets. They show that despite the popular conception, contagion is not the norm during emerging market crises. In contrast, crises originating in developing markets have proved far more contagious. They show that the value effect has been strong both within emerging markets and as the basis for a successful rotation strategy between markets. They document the continuing diversification benefits from emerging markets, and assert that the recent turn of sentiment against emerging markets seems overly pessimistic from the perspective of a long-term investor.
The growth puzzle: The second article revisits three controversial findings relating to economic growth and stock market returns. In their 2002 book, Triumph of the Optimists, the authors had found that in a cross-section of countries, long-term equity returns were inversely related to per capita GDP growth; in their 2010 Yearbook, they had found a negative relationship over time between past GDP growth and stock market performance; and finally, they had found that real dividend growth was slower than national economic growth. The 2014 Yearbook re-examines this puzzling evidence and offers some potential explanations. The authors show that population flows tend to reflect aggregate economic growth, so that GDP increases are typically spread over an enlarged population. They find that economies rarely maintain a high rate of uninterrupted growth over a sequence of years, and setbacks are commonplace. Though difficult for investors to capture in portfolio returns, they show that stronger GDP growth is generally good for investors. The authors warn against chasing the shares of countries that have historically grown fast. However, they also show that perfect forecasts of future GDP changes would be very valuable to investors, while cautioning that it is hard to make accurate predictions of changes that are not already discounted in stock prices.
A behavioural take on investor returns: The third article is by Michael Mauboussin of the Credit Suisse Research Institute. The author points out that the predisposition of investors to buy after a market rise and to sell after a drop means that their asset-weighted returns are below the time-weighted returns of the funds in which they invest. In line with the long-term focus of the Yearbook, Mauboussin argues that investors can counterbalance this tendency by making predictions that place more weight on past results and less on recent outcomes.
Now covering 26 markets, 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 114-year dataset that underpins the Credit Suisse Global Investment Returns Yearbook. The authors report that, notwithstanding a strong recovery since 2009, equities have mostly disappointed since the start of 2000. However, over the long run, they have beaten inflation, bonds and cash in every country with a continuous 114-year history.
The Sourcebook also investigates the impact of investment styles on portfolio performance, emphasizing size, value, income and momentum effects in stock returns. The authors report 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.
The Yearbook is available as a free download here . The Sourcebook is a hard-copy publication and can be sent only by post. Copies of both publications may be requested by journalists from the press contacts below.
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