Credit Suisse Global Investment Returns Yearbook 2023

Amid the wealth of historical data and analysis the Yearbook provides for 35 countries, spanning developed and emerging markets, and stretching back to 1900, three aspects are particularly topical in this edition.

First, the long-run history of returns shows how equities have outperformed bonds and bills in every country since 1900. It is good to have this perspective when equities go through a period of poor visibility, as now, as it reinforces our decision to keep strategic asset allocations to equities unchanged at 50%, for example, in balanced portfolios and look for the appropriate valuations and earnings expectations to rebuild equity allocations tactically from the current underweight.

Second, while equities have enjoyed excellent long-run returns, they are not and never have been the hedge against inflation that many observers suggest. Inflation, when elevated, is not helpful to any asset class as it reduces the real return that can be earned on top of inflation. Investors should keep that in mind when they calibrate the return expectations for their financial asset portfolios this year and next: expect lower real returns than in previous years when inflation was low.

Third, the historical risk premium in equity and bond returns relative to bills exists for a reason, namely a necessary payment for the risk of volatility and drawdown. A prolonged period of high and stable real returns perhaps dimmed the focus of many here. Over the last two decades, we have experienced four equity bear markets, and investors need to be paid for this risk. We believe we are ahead of a period of high equity risk, and the Yearbook reminds us of how portfolio diversification can mitigate such risks. In our view, bonds will play their diversifier role again as we approach the end of the monetary tightening cycle. However, reaping the benefits of diversification may involve more than just mixing equities with bonds, as the lack of fortune of 60:40 equity-bond strategies painfully reminded investors last year. In the new geopolitical context that has emerged since 2022, this year’s focus chapter looks in detail at the role of commodities as a diversifier.

Key facts and numbers

From 1900 to 2022, average real world equity returns were 5% compared to less than 2% for global bonds and lower than 1% for bills.

The higher real interest rates, the higher the returns of both bonds and stocks in the subsequent five years. We have transitioned from negative –1% real 10-year bond yields, as measured by US inflation-protected bonds, to positive +1% real yields since last year. In the subsequent five years, typical annual real equity returns are 5.1% historically. Typical annual real bond returns are 1.6%. This is up slightly from the average five-year returns that follow a period of negative real interest rates.

Inflation is bad for both bonds and stocks, but worse for bonds than for stocks. When inflation is around 4%, real equity returns are 6.0% and real bond returns are close to 0%. This contrasts with 11.2% real equity returns and 4.7% real bond returns when inflation is 1.7%.

Investors’ views of the future are conditioned by past experiences. These past experiences differ across generational cohorts, as defined by birth year, not by current age. Baby Boomers (born 1946–64) were the post-war generation; followed by Generation X (born 1965–80) and Millennials (born 1981–96). Demographers and social scientists report major differences in the tastes, habits and expectations of each cohort. However, their capital market experiences have been broadly similar. 60:40 equity-bond portfolios have earned Baby Boomers 5.6% on average in real terms, 5.1% for Gen X and 4.7% for Millennials. Generation Z (born 1997–2012) faces a different future, however. For them, the 60:40 portfolio is expected to offer a real return of around 3% – appreciably lower than the real return enjoyed by the previous three generations.
Gold has earned an average real return of less than 1% with an equity-like volatility of 17% but this is still 0.3% more return than cash.

Credit Suisse SFO Index Q4 and full-year 2022

As we speak about investment returns, it is worth mentioning what the Q4 update of our Credit Suisse Single Family Office (SFO) Index has shown. Overall, SFOs shed a modest –0.5% in Q4, bringing the full-year performance for 2022 to –12.3%. Key performance detractors over the year were listed equities (–9.3% performance contribution), followed by bonds (–2.22%). While alternative investments (hedge funds and private equity) made positive contributions over large parts of the year, they ended the year with a small negative contribution (–0.35%). Only commodities managed to contribute positively. Due to their higher equity allocations, large SFOs underperformed small and medium SFOs in 2022. This contrasts with the previous two years, when large SFOs outperformed small and medium SFOs. Regionally, Asia and Europe outperformed the Middle East. Since 2020, SFOs are about where they started pre-COVID, on a cumulative performance basis. Medium-sized SFOs have grown their assets in custody by about 5.4% on a cumulative basis since January 2020. Large SFOs are up by a cumulative +3.7%. Small SFOs are down –3.65%.