Global equities have provided an annualised real (for example after inflation) return of 5.2 percent versus two per cent for bonds and 0.8 per cent for bills.
Global equities have outperformed bills by 4.3 percent per annum since 1900.
In other words, the terminal wealth from investing in stocks would have been 165 times larger than for bills.
Question: Are equities still the best deal in town? Answer: (Imagine a Barry White’s deep voice) Sho’ Yo’ Right. But all kidding aside, latest Credit Suisse Global Investment Returns Yearbook, 2020 report, reminds us all why the equity market is still king.
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Just for the highlights — equities remain the best long-run financial investment ahead of bonds and bills over the last 120 years.
Global equities have provided an annualised real (for example after inflation) return of 5.2 percent versus two per cent for bonds and 0.8 per cent for bills.
Global equities have outperformed bills by 4.3 percent per annum since 1900.
In other words, the terminal wealth from investing in stocks would have been 165 times larger than for bills.
Global equities performed especially well with annualised real return of 7.6 percent compared with a still robust real return of 3.6 percent from bonds over the last decade.
And 2019 was a superb year for equities, with the Yearbook world index returning 28 percent (measured in US dollars).
Russian market was the best performing with a 56 percent return (measured in USD) followed by Switzerland (33 percent) and US (30 percent).
That settled. Going forward, with the economic backdrop remaining largely the same - one of exceptionally low nominal and real interest rates supporting the value of all financial assets both in developed and emerging markets –the authors estimate that the equity premium will be 3.5 percent, a little lower than the historical figure of 4.3 percent, but still implying that equity investors can expect to double their money relative to short-term government bills over 20 years.
The study shows that, when real rates are low, future returns on equities and bonds tend to be lower rather higher.
Of course, they make their disclaimer that should a turn in the monetary cycle see an upward jump in real interest rates, the reset in financial assets can be in the opposite direction.
Given the above "rosy" context (and believing all factors hold the same, which they never do), Nairobi Securities Exchange (NSE) 20 share index losses (25.9 percent year to date) should be viewed in a different light. But this is strictly for long-termers.
The discount market — currently trading at a price to earnings ratio (P/E) ratio of 8.9X and a dividend yield of 6.9 percent — offers plenty of great deals.
Additionally, something new to rejig your long-term portfolio is what experts are referring to as factors.
Factor investing — an approach that involves targeting specific drivers of return across asset classes — is building a reputation as a return enhancer.
The Yearbook highlights that long-run returns on five factors, namely size, value, income, momentum and low volatility, exhibited premiums both over the long-run and across countries.
In closing, the report does a good job giving us a thorough understanding of the nature of long-run investment returns over time and why that background is essential when forming views of what the future may hold.
But to curb over-optimism, the report pointed out equities below historical average returns since 2000 (despite the strong recovery since 2009) as a reminder of the risk involved in investment.
Nonetheless, it is safe to say, looking ahead, long termers can act in confidence investing in the asset class.
Mwanyasi is Managing Director, Canaan Capital Limited
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