For investing geeks, it’s that special time of year – the moment when the Credit Suisse Global Investment Returns Yearbook lands with a thud on our desks.
The annual big-picture overview of investing trends has a way of challenging preconceptions and the 2019 edition is no exception.
The authors – the renowned research team of Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School – take a close look at emerging markets, the likely future return from stocks and also individual national markets. Here are three key takeaways:
Our skewed worldview
Customers stand outside IKEA's first store in India as it opened in Hyderabad on Aug. 9, 2018. India is a test case for whether Ikea should keep shifting resources toward emerging economies.Mahesh Kumar A./The Associated Press
Many Canadian investors regard emerging-market stocks as fringe investments in mostly unimportant countries. We really should rethink that self-obsessed viewpoint.
The Credit Suisse team points out that emerging markets and frontier markets now account for 59 per cent of the world’s population.
Emerging markets – think China, South Korea, India, Brazil, Mexico and so on – produce almost half of the globe’s economic output when figures are adjusted to reflect the actual buying power of different currencies. The emerging-market share of global output is nearly double the level of 40 years ago.
Yet, emerging markets still make up only 12 per cent of global stock market indexes, a remarkably small presence on the world investing stage given their population and productivity.
An emerging opportunity
The knock on emerging-market stocks is that they have lagged behind their developed-world counterparts over the past 10 years, largely because of investors’ love affair with U.S. tech stocks. But there are good reasons why emerging-market stocks still deserve your attention.
Consider, for instance, the longer-term picture. Since 1950, emerging-market stocks have outperformed their developed-market counterparts, on average, by just over a percentage point a year.
This reflects the continuing shift in economic power. The share of global output produced by developed markets, such as the United States, Germany, Britain, France and Canada, has been in steady decline for four decades. These traditional powerhouses once accounted for slightly more than 60 per cent of world gross domestic product; they now generate only 37 per cent. Yet, developed countries still make up roughly 88 per cent of global stock market capitalization.
The Credit Suisse researchers argue that diversifying into emerging-markets stocks can reduce risks for investors in Canada and other developed markets, because emerging markets have the ability to go up when developed markets go down.
Details do matter, though. One intriguing observation in this year’s report is how much your choice of stock market index would have mattered when investing in China. Different indexes would have produced wildly different results because of variations in their qualification criteria. “Chinese stock performance seems to be a case of, What answer do you want?,” the researchers write.
Stocks or bonds?
Another interesting nugget is how well bonds have performed relative to stocks in recent decades. In Canada, for instance, bonds and stocks delivered identical after-inflation returns – 4.4 per cent a year – between 1969 and 2018. Since 2000, bonds have actually done better than stocks, 4.9 per cent to 3.5 per cent.
Sadly, though, this is not a great reason to stuff your portfolio with fixed-income investments. Bonds’ strong performance in recent decades is a mere blip in 119 years of market history.
Since 1900, bonds have struggled to beat inflation by more than a percentage point. Their much stronger results in recent decades reflects unrepeatable factors, such as the big fall in inflation from the early 1980s onward and the subsequent decline in real rates since the financial crisis. As rates fall, bond prices go up.
With bond yields now hugging some of their lowest levels in generations, the Credit Suisse authors suggest that investors are unlikely to reap much after-inflation return from bonds. However, the picture isn’t a lot better for other assets. When real interest rates are unusually low – as they are today – the subsequent returns for all types of investments also tend to be low, according to the researchers.
Stocks have typically outperformed cash by 4.2 percentage points a year. That premium has now fallen to about 3.5 percentage points, according to the Credit Suisse team.
The upshot of all this? Stocks are still the best deal in town, but by a smaller margin than they used to be.