Equities outperform other asset classes over long periods, shows data

Equities have outperformed most asset classes over the long run. Over the last 122 years, global equities have provided an annualised real return of 5.3 per cent in USD terms, versus 2 per cent for bonds and 0.7 per cent for bills, the Credit Suisse Global Investment Returns Yearbook, published by the Credit Suisse Research Institute in collaboration with London Business School, said. 

Equities have outperformed bonds, bills and inflation in all 35 markets. Since 1900, world equities outperformed bills by 4.6 per cent per year and bonds by 3.2 per cent per year. Prospectively, the equity risk premium will be around 3.5 per cent, a little below the historical figure of 4.6 per cent.

With a 3.5 per cent premium, equity investors would still expect to double their money relative to short-term government bills in 20 years. 

Since 1900, the US has been the best-performing stock market with an annualised real return of 6.7 per cent. Its share of global equities has quadrupled to an astonishing 60 per cent. The Indian stock market has achieved an annualised real local-currency return of 6.7 per cent per year since 1953.

Historically, diversification across stocks, countries and assets has greatly improved the return-risk tradeoff, the yearbook said. However, stock and country diversification may be less effective during immediate crisis periods. "We have seen that the stock-bond correlation tends to be negative during crisis periods. This makes government bonds extremely valuable diversifiers that raise the power of portfolio diversification when most needed,” the report said.