Equities have delivered virtually zero capital growth over the past 250 years, according to Theo Zem...
Equities have delivered virtually zero capital growth over the past 250 years, according to Theo Zemek, co-head of fixed interest at New Star Asset Management.
Zemek said a stock market price index from 1750 to date would show that £100 invested in equities at the beginning of the period would still be worth just £100 now, when adjusted for inflation.
'There have been no capital gains in the equity market from 1750 to the present,' she argued. 'This applies in general to both the UK and US and demonstrates there is little truth in the belief equities deliver capital gains.'
However, Zemek is satisfied equities are not a lost cause and it is still worth investing in the asset class. This is not because of the capital growth of the underlying shares but because of the income stream they generate.
The income on the initial £100 generated by equities over the 250-year period would have amounted to around £10m, a real return of 4.2% when adjusted for inflation, she noted.
Returns of this order from equity markets are likely to continue, Zemek predicted.
'I expect there will continue to be relatively little capital growth in the equity market but if we seek out good income-yielding equities, we can expect real rates of return of around the historical norm of 4.2% going forward,' she added.
Zemek believes the combination of income-yielding equities and fixed interest will deliver good returns.
'If you have corporate bonds balancing income from a fixed level, alongside equity income-type stocks giving you some sort of anchorage in terms of this income stream, you have two asset classes that look attractive,' she said.
Within fixed interest, Zemek is negative on gilts but more bullish on the outlook for shorter-dated corporate debt.
'We need to ask ourselves whether we think we will have a burst of inflation to get us through trouble or whether we will go through a typical belt-tightening procedure during which consumer expenditure is not as great as it was,' she said.
'The final scenario is that we get a repeat of the boom days of the late 1990s and early 2000. In my opinion, belt-tightening will be on the cards.'
A reduction in expenditure would affect tax receipts and lead to further government borrowing and hence a decline in the performance of gilts, Zemek said. Likewise, she sees cuts in consumption as a negative influence on equity markets.
'But they are good for creditors of companies with a great deal of debt outstanding,' she said. 'If you believe belt-tightening is the most likely scenario, the shorter-dated, higher-yielding, middle-of-the-market corporate bonds are still going to have some mileage in them. Meanwhile, they pay a nice income.'
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