Credit Suisse report reveals investors have a lot to relearn
The Credit Suisse Research Institute has just published the 2023 Global Investment Returns Yearbook – this time with a reminder to investors that history can and should be learned from.
The Global Investment Returns Yearbook is an authoritative finance guide to historical long-run returns covering stocks, bonds, bills, inflations, and currencies across 35 countries with data going back to 1900. The Credit Suisse Research Institute partnered with the London Business School to create the 272-page report.
In the 122 years from 1900 through 2022, the Credit Suisse Research Institute found that the U.S. stock market was only the second-best performing market among the 35 countries, recording a 6.38% annualized real return in terms of U.S. dollars. It finished closely behind the Australian stock market, which came out on top with a 6.43% annualized real return in U.S. dollar terms.
During the same period, the 2023 Credit Suisse yearbook found that stocks across the globe reaped annualized real returns of 5%, while bonds historically reaped 1.7% returns. Since the 1980s, bonds started to deliver higher, stock-like returns – a trend which came to an abrupt halt last year as inflation and rising cash rates ground bonds back to losing levels. As a result, the 2023 Global Investment Returns Yearbook found that most countries reported losses on bonds last year.
Paul Marsh, an emeritus professor of finance at the London Business School and one of the masterminds behind the creation of the FTSE 1000 share index, gave a presentation on the yearbook the same day it was published, the Institutional Investor reported.
“When inflation was exceedingly low – in periods of deflation – bonds did quite well,” Marsh said. “In periods of high inflation, bonds did absolutely dreadfully, and that’s exactly what you’d expect.”
This year’s Global Investment Returns Yearbook came with a reminder to investors that stocks were not an inflation hedge despite their tendency to overcome inflationary challenges.
“When inflation is high, [equities] tend to do poorly,” Marsh said. “But in the long run, they have beaten inflation, so a lot of people claim they’re an inflation hedge….”
Marsh clarified that that was a mistaken belief born of confusion. While he conceded that “stocks beat inflation” in the long run, he clarified that stocks were able to do so because of their long-term nature, and the equity risk premium attached to them.
“They are not an inflation hedge; they have a negative correlation with inflation,” Marsh said.
To prove this point, the 2023 yearbook showed that investors in 2022 had invested in both stocks and bonds, believing that they had created an inflation hedge in this manner. The hedge failed due to multiple factors, primarily inflation, sharp pulls in real interest rates, and the ongoing rate-hike cycles.
“A historical risk premium in equity and bond returns relative to bills exists for a reason, that being a necessary payment for the risk of volatility and drawdown,” authors said in this year’s Global Investment Returns Yearbook. “A prolonged period of high and stable real returns had perhaps dimmed the focus of many here.”
Investors would have benefitted from a refresher course on the correlation between stocks and bonds after having grown accustomed to year after year of outsized returns. While bonds have historically performed well in times when stocks struggled, this correlation has changed over time, Credit Suisse pointed out.
Beginning from 1900 and until 1949, Marsh explained that the Credit Suisse yearbook had recorded an average, global correlation between stocks and bonds of 0.45. By the latter half of the century, the relationship between stocks and bonds had a correlation of 0.34.
“The recent fortunes of 60/40 equity/bond strategies are a painful example of this,” the Global Investment Returns Yearbook said. “[Investors] trusted too heavily in the recent negative correlations between the two assets rather than properly consulting the history books.”
Despite the yearbook’s grim reminder, neither the Credit Suisse Research Institute nor the London Business School made an express asset-class preference or recommendation to abandon investing in the stocks or bonds market. Instead, the 2023 yearbook authors aimed to demonstrate that investors needed to relearn key relationships among stocks, bonds, and inflations based on the actual progress of the global stock market throughout history. Otherwise, they would end up making connections that had stopped existing for years or had never operated the way they thought at all.
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