Equity investors make best returns amid falling interest rates: UBS

Based on free-float market capitalisation in the FTSE All-World index, which spans the investable universe for a global investor, the US market accounts for a staggering 60.5 per cent of total value

Equity market investors make best returns in a falling interest rate regime, wrote analysts at UBS in their yearbook for 2024.

As an asset class, equities, they said, have outperformed bonds, bills, and inflation in all 21 markets for which the yearbook has a continuous history.

Equities have dominated bonds, while bonds have outperformed treasury bills.

“The majority of long-run asset returns are earned during easing cycles. From 1914 to 2023, the US markets were in a rising interest rate mode 45 per cent of the time and in a falling mode 55 per cent of the time. The annualised return on US stocks and bonds was 9.4 per cent and 3.6 per cent during the easing cycles, compared with just 3.6 per cent and a negative 0.3 per cent during hiking cycles. UK data since 1930 reveals a similar pattern,” wrote Elroy Dimson, Paul Marsh, and Mike Staunton of UBS in the Global Investment Returns Yearbook 2024 released on Wednesday.

The UBS Yearbook studied and assessed the returns and risks from investing in equities, bonds, cash, currencies, and factors in 35 countries since 1900.

The worst period for global equity investors, according to UBS’ findings, was the Wall Street crash and the ensuing Great Depression in 1929–31 where the FTSE All-World index fell by 54 per cent in US dollar terms, as compared to 31 per cent in World War I, and 12 per cent in World War II.

“For the US, Germany and France, this was the most severe of the three great bear markets and, from 1929 to 1931, the losses in real terms were 61 per cent, 59 per cent and 44 per cent, respectively,” the UBS note said.

US dominance

In the context of global investable markets based on free-float market capitalisation in the FTSE All-World index, which spans the investable universe for a global investor, the US market dominates its closest rival and accounts for a staggering 60.5 per cent of total world equity market value.

“Japan (6.2 per cent) is in second place, the UK (3.7 per cent) in the third position, while Mainland China is ranked fourth (2.8 per cent). France, Canada, Switzerland, Australia, Germany, and India represent 2 – 3 per cent of the global market, followed by Taiwan with 1.7 per cent and South Korea with a 1.4 per cent weighting,” the UBS' Yearbook 2024 said.

The US equity market overtook the UK early in the 20th century, UBS said and has since been the world’s dominant market, apart from a short interval at the end of the 1980s when Japan briefly became the world’s largest market. At its peak, at the start of 1989, Japan accounted for 40 per cent of the world index, versus 29 per cent for the US.

“Subsequently, Japan’s weighting has fallen to just 6 per cent, reflecting its poor relative stock-market performance. The US has regained its dominance and today comprises an astonishing 60.5 per cent of the total world capitalisation,” UBS added.