UK market has 38% chance of seeing third successive year of negative returns, says report
The UK stock market has nearly a four in 10 chance of having a third negative year in a row, according to the Global Investment Returns Yearbook 2002 from ABN Amro and the London Business School.
Based on analysis of past market performance, the report said the probability of the UK market falling for a third year in succession is 38%, and 31% for the world stock market index.
The two organisations also found that, for world markets, three-year runs of negative returns have occurred 6% of the time over the past 102 years, while two-year periods of negative returns are more frequent, occurring 16% of the time.
Elroy Dimson, Professor of Finance at the London Business School, said: 'The 21st century has started badly. In all the major markets, equity returns have been negative for two years running.
'Over 2000 to 2001, the real return was -24% in the US, -20% in the UK, -38% in Japan and -31% in US dollar terms for the world.
'A two-year run of negative returns looks poor but is not especially unusual. The chances are by no means low that on 1 January 2003 we will be looking back on a run of three negative years.'
Dimson added that the distinctive feature of equity returns over 2000 and 2001 is not that there were two years of negative returns but that the losses were large. He said the 18-month bear market in the US between March 2000 and September 2001 was the longest US market decline since the period 1980 to 1982.
Peak to trough, returns were -34% in the US, -29% in the UK and -39% in the world index, in US dollar terms. Dimson said this was worse than in the US in 1980 to 1982 and the UK in 1990. He added that the only post-war period with lower returns was the bear market of 1973 to 1974, when US equities fell by a half and UK equities by two-thirds.
Dimson said: 'To many investors, the past two years seemed even worse since they followed the roaring 1990s and the biggest and longest bull market in recorded history.
'In contrast to more recent times, the 1990s was a golden age. Inflation fell from the high levels seen in the 1970s and the late 1980s. This lowered interest rates and bond yields. Meanwhile, expectations about the rate of real corporate profits growth accelerated.'
During the past five years of the 20th century, Dimson added, the FTSE All-Share saw annual returns that varied from 14% to 24%. Over the same five years, the annual return on the US equity market varied between 21% and 36%.
Dimson said many investors had become convinced that high corporate growth rates could be extrapolated into the indefinite future and, with steady growth rates, equity risk appeared to be lower.
'Then the technology bubble burst,' he said. 'Growth projections had been unrealistic. High growth expectations were seen to be associated with high risk. Investors demanded a larger reward for equity market risk exposure.
'Stock prices fell in 2000 and then again in 2001. With markets having fallen, investors started to project lower returns for the future.'
Dimson said the five worst-performing UK sectors in 2001 were all technology, media and telecoms-related. Information technology was by far the worst, with a return of -77%.
The other four sectors were software, telecoms, media, and electronic and electrical equipment.
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