A survey of global equity markets over the past 103 years shows that statistically speaking there is...
A survey of global equity markets over the past 103 years shows that statistically speaking there is a 40% chance of the UK stock market declining for a fourth straight year, and the FTSE 100 index might not reach its 2000 high of nearly 7,000 points until 2018.
The annual "Global Investment Returns Yearbook" jointly published by investment bank ABN Amro and the London Business School, says there is no evidence to suggest that a three year bear market must be followed by recovery.
"The market has no memory," says Elroy Dimson, one of the reports authors.
"It simply spins the roulette wheel again."
The findings could be especially important for pension funds: the report criticises excessive return projections that underpin the funding of pension plans.
Even the 2018 date could be optimistic: if annual returns average 6% it could take until 2023 before the FTSE moves above 7,000 points.
Dimson, along with fellow LBS professors Paul Marsh and Mike Staunton, adds that simply holding stocks in the knowledge that equities have easily outperformed both short and long-term bonds since 1900 is not the answer.
Even the best performing stock market during the past 103 years, the US, which has averaged a return of 6.75% over time, demands that investors hold equities for more than 20 years to be sure of positive returns.
Investors in Japan would be required to hold stock for more than 50 years to be sure of getting a positive return.
In the end, the superior returns from equities over bonds is a function of risk and reward, the report says.
Investors simply have to live with the fact that in order to get the superior returns from equities, they will also have to take on more risk.
Annualised real returns from equities in the UK during the 1900-2002 period averaged 5.2% compared to 1.3% for bonds.
It is also important to put the current losses in perspective, Dimson, March and Staunton say, as the UK stock market lost 71% of its value in the 1973-4 crash, a far greater percentage than the losses experienced in this bear market.
And the fact is that not all funds have been dogs: the range of fund performance in the past three years uncovered by the report suggests a range of between 15% gains to 53% losses.
Property has returned 49% in the past three years, but it may be some years before the annual report is able to compare property and equity returns since 1900, the authors say.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected