Core financial assets will likely provide lower long-term returns for the next generation of investors even as performance expectations have improved somewhat in recent times, according to the latest Global Investment Returns Yearbook,
Now in its 25th edition, the famous historical financial markets performance study notes that forecast long-run returns from equities and bonds for the coming cohort of investors “remain lower than the previous generations have enjoyed but also around 200bps higher than could have been expected two years ago”.
Authored by UK academics Paul Marsh, Mike Staunton and Elroy Dimson, the 2024 report confirms the basic asset allocation article of faith that shares outperform bonds over the long-term while bonds beat cash.
However, the historical analysis, which covers more than 100 years for many markets, says investors need to question asset class behaviour assumptions based on periods even as long as 30-40 years.
For example, the study says “bond market drawdowns have been larger and/or longer than for equities” with the longest bear period effectively dragging on for almost 50 years starting in 1940 with a peak fall in real value of 67 per cent.
“Clearly, deep and prolonged bond drawdowns are not just a distant memory,” the report says. “They are also a feature of the very recent past and of the present. Bonds are not ‘safe’ assets and their real value can be destroyed by inflation.”
Dimson et al also show that shares have outperformed as interest rates fall.
“While equities have enjoyed excellent long-run returns, they are not and never have been the hedge against inflation that many observers have suggested. Rather, stocks should be seen as excellent inflation beaters due to the equity risk premium,” the UBS-sponsored report says. “With central banks potentially poised to begin rate cutting cycles, we demonstrate the majority of long-run asset returns are earned during easing cycles.”
The Yearbook also highlights the increasing dominance of US markets, which now represent more than 60 per cent of global stock indices compared to 14.5 per cent at the dawn of the 20th century: albeit that the US benchmark weight was even higher than current levels from the 1950s through to the 1970s.
Furthermore, the 2024 data shows the US stock market is one of the least concentrated in the world despite the outsize influence of a handful of mega-stocks over the last couple of years.
The study also digs into the US$44 trillion credit markets (roughly half the size of the pool of global equities), concluding investment grade securities have delivered a long-run premium of about 1 per cent above bonds while high-yield pays “some two percentage points higher than this”.
“For passive investors, tracking a corporate bond index may not be the best policy. There is an underperformance gap between the returns from corporate bond indices and the yield spread less default losses,” the Yearbook says. “We have seen that this gap arises from the forced selling dictated by strict index rules. Investors who are not subject to the same constraints might expect to beat the index simply by buying and holding the index constituents.”
Sub-titled ‘Leveraging deep history to navigate the future’, the report also hoses down any hopes investors may harbour of a return to normality – new or otherwise.
“Perhaps most importantly, the Yearbook shows that ‘Are we nearly there?’ is the wrong question. Financial history shows that, while there are long-run averages, there is no such thing as ‘normal’. The market’s journey never ends.”
Now published under UBS colours (following its forced takeover of Credit Suisse last year), the journey for Dimson, Elroy and Marsh goes on, too.