Investors are always in danger of losing their sense of perspective in today’s 24-hour financial news cycle. It’s important to keep an eye on the big picture – and the annual Global Investment Returns Yearbook helps us do just that.
This study is published every spring by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School, in conjunction with Credit Suisse. It covers investment returns since 1900 in stocks, bonds, and cash for 23 countries, and a global index.
The main lesson is that the greater risk inherent in holding equities compared with bonds or cash is rewarded with higher returns. The annualised real return on global stocks since 1900 has been 5.2%, compared to 2% for bonds.
But investors must be patient, as “even over periods as long as 20 years, we can still experience ‘unusual’ returns”. The 1990s were so good that the real yearly return on global stocks between 1900 and 2000 was 10.6%. Over the next decade, it was -1.3%.
This year’s yearbook has taken a closer look at emerging markets, highlighting their long-term potential – and volatility. Since 1950, they have done slightly better than their developed counterparts, returning an annual average of 12.1%, compared to 10.8%. That marked a rebound from a poor first half of the 20th century; starting in 1900, the respective figures are 7.4% and 8.4%.
Emerging markets grow up
The most important point here, however, is that a handful of disasters undermined the entire index. Investors lost everything in the 1917 revolution in Russia; similarly, China’s markets were closed following the Communists’ victory in 1949. Japan, then classed as an emerging market, suffered badly after the shattering loss in the second world war; the index lost 98% of its value.
This is a reminder that all equity market return figures are an average and can conceal some absolute stinkers. Today, emerging markets remain appealing for several reasons. Commodities are rebounding amid a strengthening global economy. Debt levels are lower than in the industrialised world and long-term growth potential higher as a growing middle class will power consumption.
Emerging economies are also becoming more diversified. As we noted last year, the biggest sector in the MSCI Emerging Markets index is now technology, so the asset class is no longer simply a play on raw materials and global growth.
But there will always be disasters – Argentina and Venezuela are the most conspicuous recent examples of mismanaged economies slipping into crisis. That’s why investors need to hold a range of emerging markets rather than plumping for one or two.
Macron takes on the rail unions
France’s president, Emmanuel Macron, has already made France’s ossified labour market more flexible. He has capped damages for unfair dismissal and allowed firms to reach pay deals with employees rather than rely on union-driven industry-wide accords. Now he is taking on France’s “most obstreperous unions”, says Pascal-Emmanuel Gobry on Bloomberg View: national railway workers. Like most of France’s public services, the railways are “excellent but unaffordable”.
Macron’s plan is to end a series of pricey privileges that sector workers have enjoyed for around 80 years, with workers henceforth to be hired under normal private-sector rules. Rail workers enjoy a job for life, automatic pay rises and free train tickets for their families; they can also retire between the ages of 52 and 57.
The unions are up in arms, and will be encouraged by their successful resistance to similar plans in the mid-1990s, notes Charles Bremner in The Times. But this time round voters finally appear ready “to break the taboos that have sapped the economy”: 70% of the public is in his corner.