In this blog we included a review of the 2020 previous edition, which had 2 special chapters, one on investments in ESG and the other on investment in emerging countries compared to the more advanced economies.
The core of the publication is the long-term database compiled by the authors, which covers investment yields in 32 countries over periods of up to 121 years.
This core makes this publication a unique benchmark in the long-term performance of financial markets, including stocks (e.g., the S&P 500 in the case of the U.S.), 10-year treasury bonds, treasury bills, inflation and currencies.
This edition includes an analysis of investment risk and risk premiums for stocks and bonds worldwide over the past 121 years.
In another chapter, forecasts of returns of main financial assets in the medium and long term are addressed.
Finally, the performance of emerging markets and a comparison with developed markets is also analyzed.
The performance of stocks, treasury bonds and treasury bills since 1900
In the long run, stock returns have dominated treasury bonds and treasury bills.
Over the 121 years since 1900, stocks have outperformed bonds and treasury bills in all 21 countries.
Worldwide, stocks outpaced treasury bills by 4.4% a year and treasury bonds by 3.1% a year.
This stock risk premium for treasury bonds was higher in the US, 4.4%, in the UK, of 3.4%, and in the 21 countries, 3.5%.
It also includes an analysis of the behavior of US stocks and bonds under different inflation and interest rate rate regimes since 1900.
Exchange rate fluctuations and their impact on asset returns
An interesting conclusion to the analysis of long-term currency fluctuations is that despite the enormous volatility and gains of the dollar relative to most other currencies (except the Swiss franc), parity changes have largely responded to relative inflation rates.
Over more than a century, real exchange rates against the US dollar have changed by an annualized amount of less than 1% per year.
In these terms, dollar returns have been very similar to local currency returns.
Investment risk and risk premiums for stocks and bonds over 121 years
Over the 121-year period, the annualised stock risk premium for treasury bills was 5.8% for the US and 4.3% for the UK.
On average, the risk premium for stocks in the 21 countries compared to treasury bills was 4.8%, while the risk premium in the world stock index was 4.4%.
For 10-year treasury bonds, premiums are similar, but tend to be lower.
The annualised risk premium for US stocks in relation to bonds was 4.4% and the corresponding value for the UK was 3.4%.
In all 21 markets, the bond risk premium was 3.5%, while for the global index it was 3.1%
Estimates of future medium- and long-term returns on stocks and bonds
The forecasts of future annual returns in the medium and long term for the US are also very interesting.
The authors estimate that the expected real returns of the traditional portfolio, consisting of 60% stocksand 40% bonds, is 2% per year.
This is about a third of the value of the last 90 years (based on the risk premium of 3.5% per year on current treasury bond yields).
This new world of low returns will challenge borrowers, investors, pension plans, foundations and institutions.
The performance of emerging markets and the comparison with developed markets
The long-term returns of emerging economies have been less impressive than many think.
In the long run, returns of emerging economies stocks were 1.5% a year lower than those developed, while emerging economies’ bonds underperformed by 2.4% a year.
This low performance is mainly due to the distant 1940s.
Since 1960, stocks of emerging economies have surpassed those of developed economies by about 1.5% per year.
By contrast, the bonds of emerging economies have continued to underperform, although they have slightly outperformed the obligations of developed economies over the past 20 and 30 years, but not in the last decade.
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