Long Term Asset Returns 2021
UK ASSET RETURNS SINCE 1899
UK equities delivered negative returns in 2020, contrasting with notably positive returns for their US counterparts. Gilts rallied alongside other developed market bonds, supported by large-scale monetary stimulus launched in response to the COVID-19 crisis.
Figure 1 – Real investment returns by asset class (% pa)
Note: *Entire sample. Source: Barclays Research
Figure 2 – Real investment returns (% pa)
Source: Barclays Research
Figure 2 breaks down real asset returns for consecutive 10-year intervals. UK equities underperformed gilts over the past decade with an average annualised return of 2.9% compared to the gilt return of 3.8%. 2020’s poor performance depressed equity returns for the decade. Cash had the worst decade since the stagflationary 1970s.
Figure 3 – Figure 4 Equity performance
Source: Barclays Research
Figure 3 illustrates the performance of equities against gilts and cash for various holding periods. The first column shows that over a holding period of two years, equities outperformed cash in 83 out of 120 years: thus, the samplebased probability of equity outperformance is 69%. Extending the holding period to ten years, this rises to 91%.
THE IMPORTANCE OF REINVESTMENT
Figure 4 and Figure 5 show how reinvestment of income affects the performance of the various asset classes. Figure 4 shows £100 invested at the end of 1899 without reinvesting income; the second is with reinvestment. £100 invested in equities at the end of 1899 would be worth just £167 in real terms without the reinvestment of dividend income; however, with reinvestment, the portfolio would have grown to £32,025. The effect on the gilt portfolio is smaller in absolute terms, but the ratio of the reinvested to non-reinvested portfolio is more than 600 in real terms.
Figure 4 – Equity performance Today’s value of £100 invested at the end of 1899 without reinvesting income, £
Source: Barclays Research
Figure 5 – Today’s value of £100 invested at the end of 1899, income reinvested gross, £
Source: Barclays Research
US ASSET RETURNS SINCE 1925
US risk assets ultimately delivered a strong performance in 2020, especially relative to their developed market counterparts. Returns were also meaningfully positive for Treasuries, in the context of large-scale monetary stimulus on the back of the COVID-19 crisis.
Figure 6 – Real investment returns (% pa)
Note: *Entire sample. Source: Centre for Research into Security Prices (CRSP), Barclays Research
Figure 7 -Real investment returns (% pa)
Source: CRSP, Barclays Research
Strong returns in 2020 marked the end of a strong decade for US equities and corporate bonds. The 10-year total real return of 10.5% pa for equities is well above the long-run average performance of 6.9% since 1925. This strong performance was underpinned by notable monetary accommodation from the Fed and other central banks. Looking further back in time, other strong periods for equity returns occurred in the immediate aftermath of World War II and in the late 1980s and 1990s. Accommodative monetary policy in the past decade has also been a key driver of returns for Treasuries, with the bull market observed since the early 1980s not yet having come to an end.
THE IMPORTANCE OF REINVESTMENT
Figure 10 and Figure 11 show the importance of reinvestment of income in the form of dividends on equity investments and coupons on government bonds.
Figure 8 – Value of $100 invested at the end of 1925 without reinvesting income
Source: CRSP, Barclays Research
Figure 9 – Value of $100 invested at the end of 1925 with income reinvested gross
Source: Barclays Research
Figure 10 – Barclays US price indices in nominal terms
Source: CRSP, Barclays Research
Figure 11 – Barclays US price indices in nominal terms Barclays US price indices in nominal terms
Source: CRSP, Barclays Research
With the path out of the pandemic now likely in place, we expect much of the extraordinary fiscal and monetary support to be withdrawn in the coming years.
Will the magnitude of this turn messy and cause financial disruptions?
While we explore such downside scenarios, our baseline expectations are benign; we believe that US and European policymakers will be able to accomplish the Great Unwind without undue harm to economies and investors.
But a generally smooth outcome in the Western world does not mean that the massive worsening in fiscal profiles globally will have no effect. We argue that debt does eventually matter, but more in some countries than others. Specifically, low growth and high-rate EM countries might struggle if global growth slows.
Our conclusion is that limits on debt expansion do exist and that the post-COVID world is at risk of bumping up against them. This creates a high likelihood of macro credit events over the next decade, at least in more challenged economies.
And while global mobility shrinks, the work-from-home phenomenon is likely here to stay. We reviewed the new long-term trends in real estate, including lower demand for office space, higher demand for houses, and less retail, as well as related downstream effects. We expect office demand to be reduced by about 20%, primarily as more workers use a split working week, not because more people go remote 100% of the time.
Cathedral Financial Consultants Limited is Regulated by the Central Bank of Ireland.