Tuesday, 16 February 2010

Global Investment Returns Yearbook - More Great Stuff in 2010 Edition

The 2010 edition of the justly renowned Credit Suisse Global Investment Returns Yearbook compiled by Elroy Dimson, Paul Marsh, Mike Staunton and Jonathan Wilmot is now available here (pick UK as your download country of origin as it blocks downloads to Canada for 'legal reasons'). As in past editions, it provides the individual investor with insight into global equity markets from a long term perspective. This year it takes a special look at:
  • emerging markets,
  • economic growth and stock market returns
  • US equity returns
Along the way it provides excellent primers on each subject and is definitely recommended reading.

Some highlights:

Emerging Markets
  • countries that are emerging tend to stay merging and don't move up into developed very often (only 6 in 110 years), and can just as easily slip back down into "frontier" territory. why not? - dictatorship, corruption, civil strife, wars, communism, disastrous economic policies and hyperinflation - "emerging markets have been accident prone in the past"
  • "more emerging markets have been downgraded to frontier than have been upgraded to developed. S&P’s downgrades include Argentina, Colombia, Jordan, Nigeria, Pakistan, Sri Lanka, Venezuela and Zimbabwe."
  • "... China expected to displace the USA as the world’s largest economy by around 2020, and with India overtaking the USA by 2050."
  • "In the late 1970s, emerging markets gave similar returns to those of developed markets, but they underperformed in the 1980s and 1990s. In the 2000s, however, they beat developed markets by 10% per year."
  • "... the emerging markets index has been consistently more volatile than the MSCI World"
  • higher risk of emerging markets should be worth up to 1.5% per annum extra return compared to developed markets
  • correlation of returns between emerging and developed markets has been rising steadily for 30 years but are still low enough to provide significant diversification benefits to the global investor
  • there was a big jump up in correlations from about 80% to 90% as a result of the 2008 crash so future correlations should be lower than 90% unless another similar crash comes along
  • surprise! the country with the highest return of any during the decade 2000-2009 was .... drum roll please - COLUMBIA!! at over 30% or so annualized return
  • from the March 2009 bottom to Dec.31st, a whole raft of emerging countries had phenomenal gains of 100% or more
  • it is impossible for individuals to invest in emerging markets according to the actual market cap due to restrictions placed on foreign investors or shares being in private or government hands, a prime example being China; moral of the story - market cap weighting is a theoretical ideal that is difficult to even approach
Economic Growth and Stock Returns
  • "... the link between GDP growth and stock returns is empirically far weaker than many suppose."
  • "Looking at 83 countries over 110 years, we find no evidence that investing in growth economies produced superior returns."; the reason is simple, investors predicted and expected higher growth so bid up prices too high to provide good future returns - stock returns are a good predictor of economic growth rather than the other way round.
  • however, if you could perfectly predict future economic growth and not base investment on recent past economic growth, then you would make a high return; stock markets seem to extrapolate growth, price it in too high to be able to gain better future returns
  • they explicitly liken this to value vs growth investing - fast growing countries are the growth countries while the slow growers are the value countries "In recent decades, investors have historically earned the highest returns - though with greater risk - by adopting a policy of investing in countries that have shown recent economic weakness, rather than investing in those countries that have grown most rapidly."
  • their conclusion: "Investors should ensure that their global portfolio is diversified across slow and fast-growing economies."
Prospects for US Stock Returns
  • "looking forward, it is more likely that real dividends and earnings will grow in line" (with each other)
  • "... if you believe that America will likely renew itself yet again and deliver trend productivity growth of 2% p.a. in the future then US equities are arguably closer to “fair value” than normal, and nowhere near bubble territory"
  • "... given the size of the American market, its importance to emerging country exports and the risk of protectionism in a bad scenario, investing in emerging equities would likely provide no hedge against a steep drop in US consumption, GDP and equity returns."
  • "... nearly a quarter of total US profits and about 30% of S&P 500 sales are generated abroad"
  • "When people assert that the market is overvalued, they are really expressing their skepticism about the future of US productivity growth and/or the future of globalization. Logically enough, the reverse is also true: if you believe in the potential benefits of accelerating technological change and the dramatic rise of the emerging world, then the next decade for US equities is likely to be a bright one."
  • the message seem to be, don't count out the USA - as the French saying goes, "plus ça change, plus c'est la même chose"
There is also an individual country snapshot for 22 developed countries.

  • real return on equities 5.8% per year since 1900 compared to 2.0% o bonds but ...
  • in the last ten years bonds have outdone equities by 2.0%
  • about the only developed country to have a positive real return to equities over bonds (along with Norway) in the "lost decade" from 2000 to 2009 - all of 1.0%
  • equities have returned 7.5% annualized since 2009, the highest anywhere
  • the worst performing stock market during 1990 to 2009, losing two thirds of its value in real terms. ouch!
South Africa
  • equity returns of 7.2% since 1900, the second best country; both before and after apartheid, the line looks the same, trending steadily ever upwards
  • very volatile up and down historically; they are hurting now, if you have a decade or two to wait, maybe this is a "value play" country?
  • only country to have returns to its equities, bonds and T-bills all in the top three of the 22 countries
  • equity real returns of 5.3% since 1900
World Other Than the USA
  • "from the perspective of a US-based international investor, the real return on the world ex-US equity index was 5.0% per year, which is 1.2% per year below that for the USA."
13 European Countries Together
  • they under-performed with only 4.8% real equity returns since 1900 vs the 5.4% world average
  • possible reasons for the lagging performance that the authors suggest without analysis - wars, resource rich and more vibrant New World economies


Anonymous said...

I tried to download the report, but after selecting "Kanada" as the country, i got: "Aus rechtlichen Gründen können Sie diesen Artikel nicht sehen" (For legal reasons, you can not see this item.)

CanadianInvestor said...

Thanks Anon, it seems you must pick UK as your country to be allowed to view the report. I tried Canada and got blocked too. You must clear your browser cookies first to get rid of your unsuccessful access attempt.

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