Equity Gilt Study
The Equity Gilt Study has been published continuously since 1956, providing data,analysis and commentary on long-term asset returns in the UK and US. This publication provides a uniquely long and consistent database: the UK data go back to 1899, while the US data – provided by the Centre for Research in Security Prices at the University of Chicago – begin in 1925. We have also used the Equity Gilt Study as an opportunity to analyze medium- to long-term market trends.
Chapter 1 revisits the analysis of investment returns that appeared in last year's edition to account for the huge (roughly 20%) rally in global equities that has occurred since then. This performance can be attributed at least in part to the reduction in negative tail risks left over from the last crisis. With lower volatility having already been priced in, equity returns over the next five years are also expected to be lower – in the 3-4% range – than we had been anticipating previously and well below historic norms. Even so, returns on equities are likely to easily beat those on cash and bonds, both of which we expect to be negative in inflation-adjusted terms. The continuation of extraordinarily easy monetary policy should keep nominal returns on cash negligible, and the eventual normalization of monetary policy is expected to render returns on bonds even lower than cash.
Chapter 2 revisits last year’s theme that the prices of safe haven assets have been elevated because of the structural decrease in their supply. This time, we look at the structural demand for these assets, and find that it is likely to remain strong, reflecting banks' adjustments to new regulations and the behavior of investors in countries with ageing populations. As a result, the so-called “Great Rotation” out of bonds into equities is not likely to be as dramatic as many people think, and bond yields should remain low relative to historic norms.
Chapter 3 asks whether China can sustain economic growth and avoid the “middle income trap” that occurs when a developing country reaches middle income but is thwarted by rising wages and falling cost competitiveness on the one hand, and a lack of skills and innovation on the other. We argue that it can: the Chinese economy is in the middle of a major and broad-based structural transformation that will lead the country to slower but more sustainable growth. While the path is not without significant risks, our base case is that China will reach high-income status over the next decade or so.
Chapter 4 focuses on the risks associated with the extraordinary loose monetary policies of the major central banks since the onset of the financial crisis. Beyond the risk of high inflation, asset price bubbles and stagnant productivity resulting from the propping up of “zombie” companies could also emerge if extreme monetary accommodation is maintained for too long. The authorities will have to act deftly to ensure these risks from QE are contained.
Chapter 5 considers the portfolio implications of the new bond regime discussed in Chapters 1 and 2, taking as a starting point the assumption that the strong bond returns of the past 30 years are probably behind us.
We sincerely hope that you find the data and the essays interesting and enlightening, as well as useful inputs to your investment decisions.
To obtain a hardcopy of the Equity Gilt Study, please email firstname.lastname@example.org. Copies of the Equity Gilt Study are provided free of charge to corporate and institutional/professional clients. Alternatively, copies can be purchased for £100 including postage & packing* FOR PRIVATE CIRCULATION ONLY: The figures and information in this book are believed to be accurate, but are not guaranteed. No part of this document may be reproduced without the express consent of Barclays Capital.
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