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Equities outperform bonds in the ultra-long run, says study

By Ashley Coutinho
March 16, 2021 09:04 IST
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Equities remain the best long-run financial investment, ahead of bonds and bills, says a Credit Suisse study.


Illustration: Dominic Xavier/

Ultra-long term equity investments have been a lot more rewarding than debt, a study published by Credit Suisse Research Institute in collaboration with London Business School shows.

“Over the last 121 years, global equities have provided an annualised real return (in dollar terms) of 5.3 per cent versus 2.1 per cent for bonds,” shows the study, which has looked at returns for 23 countries since 1900.

In the Indian context, equity returns are even more favourable.


Since 1953, equities have generated annualised returns of 6.5 per cent and government bonds only 0.4 per cent.

“Equities remain the best long-run financial investment, ahead of bonds and bills,” the Credit Suisse Global Investment Returns Yearbook 2021 observes.

After the turn of the century, debt returns have improved considerably.

Between 2001 and 2020, equities have returned 8.1 per cent, compared to 5.1 per cent by bonds.

Since 1900, EM equities have underperformed developed market (DM) equities by 1.4 per cent per year, while EM bonds have underperformed by 2.2 per cent.

Since 1960, however, EM equities have outperformed DM equities by around 1.5 per cent per annum.

Two decades ago, EMs made up less than 3 per cent of world equity market capitalisation and 24 per cent of GDP.

Today, they comprise 14 per cent of the free-float investable universe of world equities and 43 per cent of GDP.

China is the largest EM and its weighting in EM indices has grown rapidly from just 3 per cent in the early 2000s to 39 per cent.

With the gradual inclusion of A-shares, the country’s weighting is expected to grow further.

Despite China’s unprecedented economic growth, the annualised return from its stock market has been almost the same as DMs, the yearbook says.

The study shows investing in EMs has become a lot less risky over the past two decades.

"Investors should not be deterred from investing in EMs because of risk.

"The risk of individual EMs has fallen dramatically over the last 20 years, while the gap between the average risk of EMs versus DMs has also fallen.

"Despite this, EMs still offer important diversification benefits to investors," the yearbook says.

The study cites the examples of Hong Kong SAR (now a DM), South Korea, and Taiwan, which have given robust returns in the past.

EMs, such as Argentina, Nigeria, Pakistan, Venezuela, and Zimbabwe, on the other hand, have, underperformed their potential.

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Ashley Coutinho in Mumbai
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