Asset returns, a ten-year view

Asset returns, a ten-year view

Earlier this year a reader suggested we look at how assets have performed over the last decade. We have taken the idea up and examined the gains and losses an investor would have made on a range of assets.

• The last ten years have been a period of volatility and surprises, including Donald Trump’s election victory in 2016, Brexit, the pandemic, a deep recession, the energy crisis of 2022 and conflicts in Ukraine and Gaza. Since the pandemic investors have had to deal with the biggest inflation shock the West has seen in 40 years. That has had a significant effect on real asset returns.

• The general price level in the UK and US is about 35% higher than ten years ago, with most of the increase occurring since 2022. In the euro area prices have risen by 26%. Just to preserve spending power US and European investors need to have made returns of about 30% in the last decade. (Given that investment income and capital gains outside, for instance, pensions, are taxed, the actual returns needed to preserve real, after-tax spending power would be even higher than 30%.)

• If I had been told in March 2014 what lay ahead for economies and markets, I might have been inclined to put a fair amount of money into cash as a hedge against uncertainty. That would have been a bad decision. A UK investor who, ten years ago, opened a one-year fixed rate deposit account that rolled over, would have seen the real value of their cash decline by about 20%. Investors in the US and the euro area have also seen double-digit losses in real term.

• In an inflationary period, when interest rates lag well behind inflation rates, cash is not king. The same applies to government bonds. US, UK and euro area government bonds gave decent returns in the era of low inflation and low rates up to the pandemic. The ensuing inflation wiped out all the earlier gains and more, leaving investors who have held government bonds for the last ten years nursing real-term losses.

• Equities have offered some of the best protection against inflation and uncertainty in the last ten years.

• The US is the star performer, where the overall equity index has tripled in value. Chinese equities did well until 2021, but since then have been hit by the impact of COVID-19 lockdowns and rising geopolitical concerns. Over the full ten-year period Chinese equities have returned just 18%. India seems to have taken up the mantle as one of the most attractive emerging economies. Indian equities have delivered four-fold returns since 2014.

• Japan has been the other outperforming equity market of recent years. It has benefited from a weak yen, which has boosted earnings for exporters, low valuations and corporate governance reforms. Warren Buffett is one of the most high-profile foreign buyers of Japanese stocks, investing $6bn in Japan’s five major trading companies at what he described as “ridiculous prices” during the pandemic. Mr Buffett’s investments have paid off, with Japanese equities soaring since 2021. Over the last ten years they have returned 161%. Some might say it is about time too. In the previous quarter of a century, the period that followed the end of Japan’s long boom, the Japanese equity market almost halved in value.

• UK and euro area equities have yielded about 65% over the last ten years. That is a decent real return, but a fraction of what US, Indian or Japanese markets have yielded. 

• Technology has been the standout sector in most countries, far outperforming broad equity markets. Low interest rates and, more recently, lofty hopes for Gen AI, have supercharged performance. US tech stocks have risen almost five-fold since 2014, with greater gains for Meta, Apple, Amazon and Netflix. Dutch tech stocks, which include ASML, one of the world’s major makers of semiconductors, have risen seven-fold. But in tech, as for the wider equity market, China has bucked the trend. Since index data became available in July 2015 Chinese tech stocks have lost 78% of their value.

• Construction and material stocks have also performed well in many countries as a result of infrastructure spending and growth in refurbishment and housebuilding. The Irish construction and material stocks sector has risen nine-fold in value on the back of a domestic housing boom.

• Banks and real estate stocks have generally underperformed wider equity markets. Tougher regulation since the financial crisis has dampened risk taking by banks and added to their costs. Real estate has suffered from a combination of rising interest rates, the shift to hybrid working and increasingly stringent environmental standards. A ten-year investment in real estate stocks in the euro area or the UK would have delivered single-digit returns, leaving the investor worse off in real terms. The most spectacular decline has come in China, where, burdened by swathes of vacant properties and high levels of debt, real estate stocks have halved in value.

• In many countries housing is one of the most widely held assets. House prices were buoyed up by low interest rates until 2022 since when they have proved fairly resilient in the face of interest rate rises and economic weakness. UK house prices have risen almost 60% in the last ten years and US prices are up by 95%. As well as (generally tax free) gains in the value of an owner-occupied property, owners pay no tax on the notional rental value of the property they live in, meaning that the true returns are even higher. 

• Among alternative assets whisky has risen 322% and fine wine 149% outperforming global equities. The price of bitcoin has risen from $387 in 2014 to over $70,000 today, suffering wild gyrations along the way.

• One of the paradoxes of the last decade is that in a time of uncertainty and volatility and, latterly, inflation, equities should have done so well. They are, after all, a relatively risky asset. Although equity markets have been driven by the soaring value of technology stocks many other, less glamorous equity sectors have seen reasonable, though smaller gains.

• The pandemic was a great challenge, wiping almost one-third off the value of the global equity market in the span of February-March 2020. But once central banks slashed interest rates and governments pumped up spending equities took off again. Soaring inflation caused another setback in 2022, but since 2023, as inflation has fallen, broad equity markets have done well.

• That has not applied for all sectors or all countries or all the time. Investors with limited exposure to the US market and to technology have lagged behind. There have been big ups and downs – and vice versa. Greek stocks lost 90% of their value in 2014 and 2015, and, although they have risen since then, are far below their 2009 peak. Chinese equities did well until early 2021, since when values have almost halved. Equity investing has offered plenty of opportunities for losing, as well as making, money.

• Past performance offers lessons but few pointers to future performance. Since the start of this year equities have been rising, in part on hopes of rate cuts and growth to come. We must hope that this time equity markets are right.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.9% at 7,727.

Economics

• US inflation unexpectedly rose to 3.2% in the year to February, up from 3.1% in the previous month, sparking speculation that the Fed may delay rate cuts
• US retail sales grew by 0.6% from January to February, slightly below expectations
• The UK economy returned to growth in January, growing 0.2% from the previous month, raising hopes that it will exit recession this quarter
• UK average earnings growth continued to slow, down to 5.6% in the three months to January compared with the same period the previous year
• A Bank of England survey found that the inflation expectations of the UK public had fallen to their lowest level in over two years, boosting the case for rate cuts
• UK estate agents are at their most positive about house price growth in nearly two years, according to a survey by the Royal Institution of Chartered Surveyors
• The House of Commons Public Accounts Committee issued a report that found only 10% of funds allocated to local regeneration under the ‘levelling up’ initiative had been spent
• The spread on ten-year Italian government bonds yields over their German equivalents narrowed to the lowest level in over two years, reflecting relatively strong Italian economic performance and fiscal consolidation under prime minister Giorgia Meloni
• China is ordering a curb in infrastructure spending by local governments amid concerns over waste and rising debt, the FT reports. The pullback in spending may slow growth in the country
• Argentinian president Javier Milei’s “mega decree” of deregulation was rejected by the Argentinian Senate
• Japanese GDP growth in the fourth quarter was revised up to 0.4%, meaning that the country did not enter a recession as previously thought

Business

• Chair of the UK National Infrastructure Commission Sir John Armitt said that there is “no reason” that UK pension schemes should be obligated to invest in the UK and that they should instead pursue “the best possible opportunity for them”
• The future of video app TikTok in the US is uncertain after US legislators approved a bill stipulating that the company must be sold to a non-Chinese company within six months or face being banned from US app stores on national security grounds. The Chinese authorities have indicated that they would block any attempt to sell the company
• The UK competition authority opened an initial investigation into plans by housebuilder Barratt to acquire its competitor Redrow
• The UK government published draft legislation to quash the convictions of hundreds of sub-postmasters who were wrongly prosecuted using evidence from a faulty IT system
• US president Joe Biden expressed concern over the proposed acquisition of US Steel by Japan’s Nippon Steel, saying it was “vital for it to remain an American steel company that is domestically owned and operated”
• SpaceX successfully launched its Starship rocket on its third test flight
• UK retailer John Lewis reported an annual pre-tax profit of £56m following three years of losses
• German arms company Rheinmetall forecasts record sales this year as defence spending increases amid geopolitical uncertainty
• The UK government said that it would change the law to prevent foreign governments from owning UK newspapers after a UAE-backed group attempted to buy The Telegraph

Global and political developments

• Russia is producing three times as many artillery shells as the US and Europe combined, CNN reports. The Institute for the Study of War warned that the ammunition shortage was making Ukraine’s front line increasingly fragile
• Both US president Joe Biden and his predecessor Donald Trump won sufficient delegates to secure their respective parties’ nominations for presidential elections in November
• Russian president Vladimir Putin claimed an overwhelming victory in presidential elections where opposition candidates were blocked from running
• Far-politician Geert Wilders conceded that he will not become Dutch prime minister after a key coalition partner blocked the idea. Talks continue
• While in office in 2019, former US president Donald Trump authorised the CIA to conduct a secret campaign on Chinese social media to turn public opinion against the Chinese government, Reuters reports
• Haitian prime minister Ariel Henry resigned following chaotic scenes in the Caribbean country. His departure leaves no obvious successor
• Suspended Conservative MP Lee Anderson defected to Reform UK, which was formerly the Brexit Party
• A poll on UK voting intentions conducted by Savanta put Labour on 43%, the Conservatives on 25%, the Liberal Democrats on 11% and Reform UK on 9%

And finally… a San Francisco resident sparked interest on X when he posted about his washing machine’s surprising appetite for data consumption. The smart washing machine was reportedly using 3.6GB of data per day – rinse cycle