New research reports worldwide flight from quality in 2003

Transcription

1 London, 5 February New research reports worldwide flight from quality in Equity markets soared in on the strength of a recovery by riskier and recovery-oriented assets, according to the edition of ABN AMRO s Global Investment Returns Yearbook. The study of long-term investment returns by Elroy Dimson, Paul Marsh and Mike Staunton of London Business School is the most comprehensive and authoritative analysis of its kind globally. It examines total returns since 9 for stocks, bonds, cash and foreign exchange in the UK and 5 other major markets, covering all the main North American, Asian, European and African markets that have existed over the period. The new report sets recent stock market performance in a long-term context. The authors findings include: Recovery in was strongest among the stocks, sectors, styles and countries that had been hurt most by the bear market. did well in compared to bonds and cash. Since 9, the worldwide equity premium the return on equities in excess of government bonds has been an annualised.%. Non-dividend paying stocks did well in. But among dividend-payers, high-yielding stocks did best of all in. Dividends contributed around one-half of total returns since 9. Over the last years, equities tended to have higher returns after dividend yields were high. Micro-cap equities beat small-caps, which did better than large-cap equities both over and over the last 9 years. The outperformance of small-caps in and over - was a worldwide phenomenon. By March last year, many markets were at an eight-year low and leading equity markets were at one-half of their start- level (one-third in the case of Germany). However, over the whole of, equities rose % in the UK (including reinvested income), and by more than this in most other markets. Stock markets that had previously fallen the most typically did better in. Stocks with the worst returns prior to also performed best last year. Government bonds were disappointing in, with real returns in the major bond markets in the range to +%. were outperformed by equities. In three-quarters of the 6 Yearbook countries, bonds outperformed cash.

2 Chart below compares the UK s performance with that of the US, Germany and Japan across : Chart : Equity performance in major markets, Total return index levels, rebased to end-december = Germany United States Japan United Kingdom Feb Feb Mar Mar 9 Apr Apr 7 May May Jun Jun 6 7 Aug Aug Sep Sep Oct Oct 5 9 Nov Nov Source: Dimson, Marsh and Staunton (ABN AMRO/LBS), Wilshire Associates, and Thomson Financial Datastream 7 Dec Dec Dec Emerging markets performed better than developed markets. Real equity returns were positive everywhere, in contrast to, when real returns were negative in every country. In local currency terms, the return on the FTSE All-World Developed index was 5%; on the Advanced Emerging Markets index %; and on the Emerging Markets index 67%. Returns were even higher in US dollars. Chart plots real (inflation adjusted) returns in for the world s 5 largest equity markets: Chart : Real returns from stocks and bonds during Real return during (%) Neth Fin Chi Aus Bel Ita SAf UK Fra Wld Swi Can Mal Ire Jap US Spa Kor Den Swe Tai Mex Ger Sing HK Bra Source: Dimson, Marsh and Staunton (ABN AMRO/LBS) and Thomson Financial Datastream Small-cap stocks performed better than large-caps. As reported in the Hoare Govett Smaller Companies Index report of uary, a small-cap premium existed during, which was substantial in nearly every country. The annualised small-cap premium over was positive everywhere. Between and the large-cap dominated world index gave a return of 6.5%pa. In contrast, the average return on small-caps around the world averaged +5%. Value stocks performed better than growth stocks. The value premium (the return differential between value and growth stocks) was substantial in every country during. The annualised value premium over was positive almost everywhere with an average premium of 6% pa. In half of the countries studied value stocks gave a positive return, and in half a negative return. The four years contained a major bear market, so this near-neutral performance by value stocks is remarkable.

3 Chart shows the return differential between value and growth stocks, or value premium: Chart : Value around the world, and 5 Return (% per annum) value premium value premium value return Aus Ger Swi Ita Can Bel US Den UK Spa SAf Ire Jap Neth Fra Swe Source: Dimson, Marsh and Staunton (ABN AMRO/LBS) and MSCI style-based indices. The professors summarise that equities performed best over the long run in all sixteen countries, as chart demonstrates. Chart : Real returns on equities and bonds, 9 6 Annualised percentage real return Bel Ita Ger Fra Spa Jap Swi Ire Den Neth UK Wld$ Can US SAf Swe Aus Source: Dimson, Marsh and Staunton (ABN AMRO/LBS) and Triumph of the Optimists, Princeton University Press, This means that an initial investment in UK equities of in 9 would have grown with dividends reinvested to,5 in nominal terms by the end of. During this period UK prices rose 59-fold, which means that the initial investment would have grown in purchasing power by times, versus four times for bonds and three times for bills.

4 Chart 5 shows the cumulative total return on UK stocks, bonds, bills, and inflation from 9 to the start of. The Yearbook contains charts like this in both nominal and real (inflation adjusted) terms for every country studied. Chart 5 : UK asset returns in nominal terms, 9 Index value (start-9 =.; log scale), 9.6% per year, 5.% per year,5 Bills 5.% per year Inflation.% per year, Source: Dimson, Marsh and Staunton (ABN AMRO/LBS) and Triumph of the Optimists, Princeton University Press, In a detailed research study, entitled Forecasting the market (chapter of the Yearbook), the authors investigate using the market s dividend yield to predict stock market returns. Given that high yields tend to follow intervals in which investors became poorer and hence more risk-averse one should expect larger returns when equity yields are high. The authors show that investors who bought equities when dividend yields were high did achieve relatively large returns. However, these patterns are hard to exploit as years with an extreme yield tend to be clustered in time. The relationship was most reliable in the United Kingdom, where dividend yields signalled only one major increase in expected return (97) and one major decrease (around 999). Mostly, the authors find, naïve projections of historical market returns work better than return forecasts based on dividend yield. Professors Dimson, Marsh and Staunton concluded: Given our current state of knowledge - based on evidence from 6 countries spanning years - the historical record [presented in the Global Investment Returns Yearbook] should be the starting point for forecasts of long-run stock market returns. Mark Brown, Global Head of Research at ABN AMRO said: Building on years of successful collaboration between ABN AMRO and Professors Dimson and Marsh of London Business School, the Yearbook has established itself as the seminal source of long-run returns data. This is a major achievement in itself, which has filled important gaps in our industry's knowledge. But the Yearbook is much more than a databook. The authors use the data to address some of the most important issues in finance".

5 - - - The study is written by Professors Elroy Dimson and Paul Marsh and Dr Mike Staunton, authors of Triumph of the Optimists, the best-selling investment book published by Princeton University Press. Complimentary copies: ABN AMRO can courier the Global Investment Returns Yearbook to journalists. ABN AMRO can selected extracts: (i) the review of investment returns in ; (ii) the long-run perspective on global stock markets over 9-; and (iii) the research paper on forecasting the market. Each PDF is about pages long. Press enquiries: ABN AMRO Adrian Rimmer London Business School Professor Elroy Dimson edimson@london.edu Professor Paul Marsh pmarsh@london.edu Dr Mike Staunton mstaunton@london.edu Sarah Pearson, PR spearson@london.edu Notes to editors: ABN AMRO Netherlands-based ABN AMRO is a leading international bank with total assets of EUR 6 bn (as of September ). It has over, branches in more than 6 countries and territories, and has a staff of over, full-time equivalents worldwide. ABN AMRO is listed on the Euronext, London and New York stock exchanges. ABN AMRO operates through three Strategic Business Units, each responsible for managing a distinct client segment. Wholesale Clients provides integrated corporate and investment banking services to corporate, institutional and public sector clients worldwide. Consumer & Commercial Clients focuses on retail and SME clients in three home markets the Netherlands, the US Midwest and Brazil and in a number of selected growth markets. Private Clients & Asset Management provides private banking services to wealthy clients and investment products to financial intermediaries and institutional clients. ABN AMRO's Wholesale Clients Strategic Business Unit provides integrated corporate and investment banking solutions to over, corporate, institutional and public sector clients in about 5 countries. Its client-led approach is sector based and structured around four product groups: Financial Markets, which includes fixed income, syndicated loans, treasury, structured and project finance and risk management; Working Capital, which offers liquidity management, global payments and receivables and trade finance; Corporate Finance &, providing corporate advisory as well as equity capital markets expertise and secondary market services; and Private Equity. With a global network, specialists in all major industry sectors and a broad range of products, ABN AMRO provides local and global expertise for complex cross-border deals. The Global Investment Returns Yearbook The Global Investment Returns Yearbook was launched in. London Business School experts, Elroy Dimson, Paul Marsh and Mike Staunton, have produced it since then. The Yearbook has rapidly become the authoritative benchmark for measuring small-cap performance in the UK. ABN AMRO distributes the Yearbook to investment professionals and London Business School makes it available to other users. London Business School London Business School s vision is to be the pre-eminent global business school, nurturing talent and advancing knowledge in a multi-national, multicultural environment. Founded in 965, the School graduated over MBAs, Masters in Finance, Sloan Fellows and PhDs from over 7 countries last year. The School s executive education department serves 5, executives and 6 corporate clients on its programmes every year. London Business School is based in the most accessible and international city in the world. 5