Published by the Credit Suisse Research Institute in collaboration with London Business School, the Credit Suisse Global Investment Returns Yearbook is the authoritative guide to historical long-run returns. It now covers stocks, bonds, bills, inflation and currencies in 32 individual markets (including 9 new markets this year) and the 90-country world index. 23 of these countries have 121 years of data since 1900. The 2021 Yearbook provides detailed analysis of emerging markets (EM).

Long-term perspectives favor equity investors

• The stock market crash triggered by the spread of COVID-19 was the most rapid in history, apart from the October 1987 Crash. The market fell 35% in just 23 trading days. Recovery, however, in the USA and many other markets was exceptionally swift fueled by massive fiscal and monetary stimulus; then later in the year, markets were driven higher by news of vaccines. 
• Equities still remain the best long-run financial investment ahead of bonds and bills. Over the last 121 years, global equities have provided an annualized real USD return of 5.3% versus 2.1% for bonds and 0.8% for bills.
• Since 1900, equities have outperformed bonds and bills in all markets. For the world as a whole, equities outperformed bills by 4.4% per year and bonds by 3.1% per year. 
• Prospectively, the authors estimate that the equity risk premium will be around 3½%, a little lower than the historical figure of 4.4%, but still implying that equity investors can expect to double their money relative to short-term government bills in 20 years, despite the low real interest rate environment.
• The USA remains the world’s largest equity market by a huge margin, and today accounts for 56% of the world’s investable, free-float market capitalization. Japan (7.4%) is in second place, ahead of China (5.1%) in third place, and the UK (4.1%) in fourth position. 
• While all markets were exposed to COVID-19, a number of EMs were fast to get the virus under control, including China, South Korea and Taiwan (Chinese Taipei), which together represent about two-thirds of the overall value of EMs.
• Over the very long run, since 1900, EM equities have underperformed developed market (DM) equities by 1.4% per year, while EM bonds have underperformed by 2.2%. This underperformance can be traced back mostly to the 1940s. Since 1960, EM equities have outperformed DM equities by around 1.5% per annum.
• Investors benefited from high returns in the 1980s and 1990s. Since then, real equity returns have been below their historical averages, despite the strong recovery since 2009 and the successful weathering of the pandemic storm. Three bear markets in just two decades have provided a timely reminder of the considerable risk involved in equity investment. 
• In the second decade since the turn of the millennium, investors were fortunate; markets recovered quickly from the global financial crisis, which was followed by more than a decade of strong returns. They then recovered even faster from the initial pandemic collapse.

Relevance of emerging countries for global markets is increasing

• As recently as 20 years ago, EMs made up less than 3% of world equity market capitalization and 24% of GDP. Today, they comprise 14% of the free-float investable universe of world equities and 43% of GDP. 
• China is the largest EM. Its weight in the EM indexes has grown rapidly from just 3% in the early 2000s to 39% today. With the gradual inclusion of A-shares, the country’s weighting is expected to grow further. Yet despite China’s unprecedented economic growth, the annualized return from its stock market has been almost the same as DMs.
•  In terms of equity returns, the emerging world does offer the prospect of potentially outstanding performance from individual markets. This was the case for Japan in the post-World War II period; it subsequently became a DM. Similarly, there have been excellent returns from Hong Kong SAR (also now long regarded as a DM), South Korea and Taiwan (Chinese Taipei). 
• Whilst not detracting from these undoubted success stories, promising countries like Argentina, Nigeria, Pakistan, Venezuela and Zimbabwe have underperformed their potential.
• Investors should not be deterred from investing in EMs because of risk. The risk of individual EMs has fallen dramatically over the last 20 years, while the gap between the average risk of EMs versus DMs has also fallen. Despite this, EMs still offer important diversification benefits to investors. 
• Factor returns that are well documented in DMs, such as size, value, momentum and quality are also present in EMs. The size and momentum effects appear weaker than in DMs, while the value effect has been strong, although not immune from the worldwide malaise in value investing over the last 12 or so years. 
• Rotation of portfolios across markets can be successful over the long term when underpinned by buying shares in markets that are suffering economic weakness.

Richard Kersley, Head of Research Product, Securities Research at Credit Suisse said: “The long term perspective this unique annual study provides has rarely seemed more valuable after a truly remarkable year in financial markets with the COVID-19 pandemic and the economic and scientific responses to it the defining influences. Partnering with our expert authors, we’re delighted to provide our clients with a wholly unique perspective of 121 years of investment returns to help their decision making.
This year’s edition of the Yearbook brings to the table a highly topical deep-dive into emerging markets, reflecting the ever greater importance to global markets they reflect. Only 20 years ago, emerging markets made up a tiny proportion of world equity market capitalization. Today, they comprise almost a sixth of the free-float investable universe and their influence is likely to grow further. EMs have an essential role in diversifying global portfolios.”

Professor Paul Marsh of London Business School added: “With markets near new highs, this is the time to reflect on what to expect for the future. The Baby Boomer generation benefited from the excellent performance of worldwide equities, bonds, and blended portfolios (see left of the chart below). Their grandchildren in Generation Z face a future with far lower expected investment returns (see right of the chart). Our research provides the evidence to underpin investment strategy for the future.”

Annualized real returns (%) on equities, bonds and a 70:30 blend

The Global Investment Returns Yearbook 2021 Summary is available: https://www.credit-suisse.com/ch/en/about-us/research/research-institute.html

Charts and analysis: For charts or graphics, contact edimson@london.edu, pmarsh@london.edu, or mstaunton@london.edu

Publication details: A4 colour, perfect-bound. 244 pages, 140 charts, 85 tables, 212 references. ISBN 978-3-033-08425-4.