I started digging into The Long Term Asset Return Study released by Deutsche Bank a few weeks ago. The 90 odd page report takes a dive into asset returns over the last century and digs into the past 35 years to project how the next few decades might look.
Most of the projections revolve around shifting demographics and globalization and its broad impact on developed and emerging economies. The outward spread of globalization has been ongoing since the ’80s. It should be no surprise to see some of that revert in the years ahead. Recent political rhetoric seems to be fanning the flames, at least, on globalization.
For projections, asset returns over the next decade don’t look rosy. That falls in line with projections from other sources. So, if you’re expecting historical average returns over the next decade, temper your expectations.
For the students of history, I thought I’d share some of the historical data summarized in the report:
- In the US, over the last 100 years (since end 1916), where we have data for the widest selection of assets, Equities outperform 10yr and 30yr Governments by +4.6% p.a., Corporates by +3.8% p.a. and T-bills (cash proxy) by +6.3% p.a. (on a nominal basis). It also outperforms Gold by 5.6% p.a., Oil by 7.1% p.a., and US housing (prices only) by 6.1% p.a.
- Indeed in real terms, over the past 100 years, Gold, Oil and Housing have only returned +1.2%, -0.3%, and +0.7% respectively (p.a.). Equities over the same period gave you +6.6%, 10yr Treasuries +2.0% and corporate bonds +2.9% p.a. Over the years assets like housing and commodities have been used as a portfolio alternative to equities and bonds. History suggests that over the long run such a strategy is unlikely to produce superior results, especially relative to equities.
- Since 1800, US equities have only had two negative decades in nominal terms. The 1930s (-0.5% p.a.) and the 2000s (-0.9%). There have been three in real terms (1910s: -2.8%, 1970s: -1.5%, 2000s: -3.4%). In nominal terms three of the best five decades for equities since 1800 have occurred in the last four decades (including this current decade not yet complete). However this period also included the worst decade (the 2000s).
- 10yr Treasuries and corporate bonds have never seen a negative return decade in nominal terms. However in real terms 5 out of the 12 decades since 1900 have seen a negative return from 10yr Treasuries, including four successive decades from the 1940s. After this the last 4 decades have seen stunningly positive real returns for govt. bonds though with each decade seeing average annual returns between +3.5%-7.5% above inflation. As we discuss elsewhere in the report we can’t help thinking that we’re setting ourselves up for a return to a few negative real return decades ahead in bonds as we venture out towards 2050.
- Internationally, there is definitely a survivor bias in fixed income. Although real returns are broadly in the +1.5-2% p.a. bucket for the majority since 1900, there have been government bond markets with negative returns. Italy (-2.3% p.a.), France (-1.1% p.a.) and Japan (-0.8% p.a.) lead the way in developed markets although Germany would be the worse if we had reliable data for the hyperinflation era. This shows that negative real returns in bonds are easily possible over even very long periods.
- For equities, since 1980 (a key period in this report) virtually every country sees a higher return for equities and bonds than their long-term average. A notable exception has been Japanese equities likely due to demographics.
Source: Long-Term Asset Return Study – An Ever Changing World…
- The Coming Anti-National Revolution – R. Shiller
- The Demographic Shift and Your Money – J. Clement
- How Bond Yields Got This Low – WSJ
- Is the Value Premium Disappearing? – A Wealth of Common Sense
- How Dumb Money and Smart Money Drive Market Anomalies – Alpha Architect
- A Dozen Ways to Apply the Lessons in “The Most Important Thing” – 25IQ
- Silicon Valley’s Secrets Are Hiding in Marc Andreessen’s Library – Wired
- How I Rewired My Brain to Become Fluent in Math – Nautilus
- Cognitive Bias Cheat Sheet – Better Humans
- Today’s Innovations Are Tomorrow’s Baseline – M. Housel
- The Third Transportation Revolution – Newco Shift