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February 2019 Summary Edition Credit Suisse Global Investment Returns Yearbook 2019 Elroy Dimson, Paul Marsh, Mike Staunton Thought leadership from Credit Suisse Research and the worlds foremost experts 2 Coverage of the Summary Edition This report is a summary version of the full Credit Suisse Global Investment Returns Yearbook 2019, which is available in hardcopy only and contains four deep-dive chapters of analysis leveraging this unique dataset. The first chapter of the printed Yearbook describes the coverage of the DMS database, the industrial transformation that has taken place since 1900, explains why a long-run perspective is important, and summarizes the long-run returns on stocks, bonds, bills, inflation and currencies over the last 119 years. The second chapter of the 256-page volume deals with risk and risk premiums, docu- menting historical risk premiums around the world and how they have varied over time. The third chapter of the hardcopy book which is highlighted in this extract compares emerging market (EM) and developed market (DM) perfor- mance from 1900 to the present, documenting long-run returns, volatilities and risk premiums for todays major EMs. The fourth chapter of the full Yearbook focuses on factor investing: size, value, income, momentum, volatility and other smart- beta factors. The full 2019 Yearbook concludes with an in- depth historical analysis of the investment per- formance of 26 global markets 23 countries and three regions. To highlight the new and impactful research for the 2019 Yearbook, the opening section of this Summary Edition starts with a review of EM and DM investment returns and risk. The next section turns to a broader view of investing for the long term, with a focus on long-run asset returns, risk and risk premiums, and factor in- vesting all based on evidence that runs from the beginning of 1900 to the end of 2018. The report concludes with a short review of the investment performance of the most important markets in the world since 1900, including China, Europe, Japan, Switzerland, the United Kingdom, the United States and the World. To access the full Credit Suisse Global Investment Returns Yearbook or the underlying DMS dataset, please consult page 40. Summary Edition Credit Suisse Global Investment Returns Yearbook 2019 3 4 Preface 7 Emerging markets 17 Investing for the long term 29 Individual markets 31 China 32 Europe 33 Japan 34 Switzerland 35 United Kingdom 36 United States 37 World 38 References 39 Authors 40 Imprint 41 General disclaimer/important information Extracted from: CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2019 Elroy Dimson, Paul Marsh, Mike Staunton emails: edimsonlondon.edu, pmarshlondon.edu, and mstauntonlondon.edu ISBN for full Yearbook 978-3-9524302-8-6 For more information, contact: Richard Kersley, Head Global Thematic Research, Credit Suisse Investment Banking, richard.kersleycredit-suisse, or Michael OSullivan, Chief Investment Officer, International Wealth Management, Credit Suisse, michael.osullivancredit-suisse Copyright and acknowledgements: See page 40 for copyright and acknowledgement instructions, guidance on how to gain access to the underlying data, and for more extensive contact details. Cover photo: gettyimages, Jackal Pan 4 2019 Global Investment Returns Yearbook The 2019 Yearbook comes after the worst year for returns from global equities since the Global Financial Crisis with a decline of 9%. The accom- modating monetary environment and conditions of low volatility that provided the comforting back- drop for the extended bull market conditions we have seen for a decade or so have reversed. There are plenty of signs that corporate profitabil- ity has passed its cycle peak. Moreover, the international confrontations over global trade have brought into focus a source of market and economic risk that few investors have had to contemplate before. The economic benefits of permissive global trade had been taken as a given. The Yearbook of course provides us the ability to reflect on historical periods when such conditions were by no means the norm. As 2018 has shown, the irony is often that the countries threatening trade wars are not where stock markets have fared the worst. Set alongside the specific factors at work, the more challenging conditions investors are encountering do prompt a more realistic assess- ment of risk and return. Only an analysis of the genuine “long term” can provide an adequate understanding of these twin variables. Put in the context of the 119 years of history in the Year- book and an equity risk premium over the period of just over 4%, it underlines how rewarding and anomalous the most recent past has been for equity investors. It in turn implicitly challenges any assumption that the most recent recovery in markets and decline in volatility are a resumption of the “normal service” of recent years. Back to the “real world” For those trying to judge what “normal service” should look like, the authors continue to stress that investors should assume a more sober view of the likely excess returns equities can generate from here. This is not just judged against the standards of the last decade, but also by com- parison with the 4% observed across the life of the Yearbook. A more tempered view is a natural consequence of what by historical standards remains a world of low real interest rates. To this point, in documenting the long-run history of real interest rates in 23 countries since 1900, the study shows that, when real rates are low, future returns on equities and bonds tend to be lower rather than higher. Summary Edition Credit Suisse Global Investment Returns Yearbook 2019 5 The Yearbook does highlight that shifts from one real interest rate environment to another can see step changes in returns as investors reset their future expectations. Should a turn in the monetary cycle see an upward reset in real inter- est rates, the reset in financial assets can be in the opposite direction. While the immediate con- cerns on interest rates may have abated in this early part of 2019, this is still a scenario to keep foremost in mind. The Credit Suisse House View does not suggest a tightening cycle in the USA is complete nor has it begun in Continental Europe. The working premise that the authors still believe investors should factor into their long-term thinking and modelling is an annual- ized equity premium relative to cash of around 3%. This is a consistent view they have held throughout this millennium and has more or less proven to be the case. If this is disappointing based on recent history, it still points to equities historically doubling relative to cash over 20 years. Emerging markets in a multi-polar world In other studies from the Credit Suisse Research Institute, and in keeping with the changing mood regarding globalization (“Getting over globaliza- tion,” January 2017 and “The end of globalization or a multi-polar world,” September 2015), we have reflected on the likely emergence of a more “multi-polar world” and the significance emerging economies and markets would assume in such an environment. The inclusion of new analysis on emerging and frontier markets in this edition of the Yearbook is a timely added perspective on this theme. The challenge for investors in analyzing risk premia in emerging markets, particularly versus developed markets, has been the relatively short historical record presented by the index providers. This is a challenge the authors have tackled in prior research (see Global Investment Returns Yearbook, 2010) and update here. The percep- tion of premium returns from emerging markets is arguably shaped by the period of measurement available from index providers rather than the period that went before. The new research on emerging markets in the 2019 Yearbook includes an analysis of returns, risk premiums, volatility and hedging for as long a period as available for the ten largest emerging markets. What is self-evident from the high and wide-ranging volatility and returns in these markets is that diversification is essential across them. Material risk reduction benefits do remain for a developed market investor who diversifies into emerging markets. The proverbial “elephant in the room” is China in terms of its current and future significance for emerging market investors. With a deep-dive into this market, the authors examine the returns that both global and domestic investors have seen in China. The role provided by the differing benchmarks is key when judging widely diverg- ing performance by the indices. The authors specifically delve into the reasons behind the underperformance of A-Shares. They do poten- tially offer a significant diversification opportunity for the global investor given their low correlation with global markets. Interest shown by that investor can also encourage better corporate governance and a more fundamental approach to the market itself. Factor Investing style versus substance Whether driven by an investors desire to escape the constraints of a low return world or the asset management industrys desire to escape the fee compression on its more traditional business, “factor investing” and smart-beta strategies remain very much in vogue. A recent FTSE Russell survey (2018) revealed around three-quarters of respondents had implemented or were actively evaluating smart-beta strategies. Against this backdrop, the 2019 Yearbook refreshes its analysis of factor returns around the world. It is designed to probe more robustly into the stability of a series of specific factors and their premia with the benefit of a long history of data. The “value” versus “growth” debate of course stirs plenty of passion. Value endured another year of underperformance in 2018, continuing its disappointing run. Sadly for value investors, the Yearbook shows that it is hard to predict or time when value will return to favor in any systematic fashion. In the current environment, mirrored in this style-bias is also the outperfor- mance of technology stocks when looked at through an industry lens. Hence, an investor overweighting a value style would be under- weight the technology sector, a major call to make. The lesson from the Yearbook is to diver- sify portfolios across multiple factors and remain humble as to your predictive abilities where immediate factor performance is concerned. The 2019 Yearbook is published by the Credit Suisse Research Institute with the aim of delivering the insights of world-class experts to complement the research of our own investment analysts. For previous editions and other studies published by the Research Institute, please visit: credit-suisse/researchinstitute. Richard Kersley Head Global Thematic Research, Credit Suisse Investment Banking Michael OSullivan Chief Investment Officer, International Wealth Management, Credit Suisse 6 Summary Edition Credit Suisse Global Investment Returns Yearbook 2019 7 Emerging and frontier markets The left-hand side of Figure 1 below shows the 24 current constituent countries of the MSCI Emerging Markets index, together with their weightings. The big difference between index providers is that MSCI regards Korea as emerging, while FTSE Russell and S see panel d. DMs account for virtually all the rest (88%). Although the EM plus FM share has grown from a negligible 2% in 1980 to 12% today, there has been no progress over the last 11 years. In 2007, their combined share was 12.4%, while today it is 12.2%. What explains this remarkably low weighting? One possibility could be changes in the composi- tion of the EM population. However, there have been remarkably few EM promotions. Within the MSCI EM index, Portugal achieved DM status in 1997, Greece in 2001 (a decision reversed in 2013), and Israel in 2010. These losses were almost exactly counterbalanced in value by the 2014 additions of Qatar and UAE. Indeed, the period spanned by Figure 2 has been character- ized by the addition of countries, not removal. Stock markets in China, Russia and Eastern Eu- rope re-opened in the early 1990s after long clo- sures and these markets grew rapidly. Figure 2 includes all these countries throughout the period, but the data for the 1980s includes their GDP and population, while their stock market values remained at zero. Figure 2: Evolution of EMs and FMs, 19802018 (a) Share of world PPP GDP (b) Share of world GDP at market exchange rates (c) Share of world population (d) Share of world investable market capitalization Source: IMF, FTSE Russell, MSCI, Elroy Dimson, Paul Marsh, and Mike Staunton, DMS dataset; Korea is regarded here as an EM, as in the MSCI index series. Not to be reproduced without express written permission from the authors. 0% 25% 50% 75% 100% 1980 1985 1990 1995 2000 2005 2010 2015 2018 5 37 8 49 0% 25% 50% 75% 100% 1980 1985 1990 1995 2000 2005 2010 2015 2018 4 57 4 35 0% 25% 50% 75% 100% 1980 1985 1990 1995 2000 2005 2010 2015 2018 59 9 13 19 0% 25% 50% 75% 100% 1980 1985 1990 1995 2000 2005 2010 2015 2018Rest of world Developed Frontier Emerging markets 0.5 88 0.2 11.7
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