“Global equities have returned -29% this decade, compared to 80% from government bonds. We’ve seen two 50% equity bear markets in just five years. This combination of miserable returns and extreme volatility has led some to pronounce that, after 50 years, the cult of the equity is dead.”
Those are the opening lines of Robert Buckland’s latest strategy piece, in which he considers evidence that investors are reappraising equities as an asset class.
And Buckland makes a pretty good case for the prosecution:
Equities have never been particularly good at hedging inflation anyway, and now index-linked bonds can do a much better job .
Equities’ ability to match wage growth has been mixed. Increasingly mature pension funds will want to switch bonds as the moment of retirement approaches.
Defined contribution investors (where the individual takes the risk) may be less willing to tolerate volatile equity returns than the old defined benefit plans (where the employer takes the risk).
But most importantly, it is dreadful returns that will be increasingly putting investors off equities. Since the end of 1999, global equities have returned -29% compared to a +80% return from global government bonds. Not only have equity returns been dire, but the volatility has been brutal. Having two 50% bear markets in one decade is enough to test the patience of the most determined equity cultist. Just as excellent equity returns helped to promote the cult of the equity in the 1950s, so terrible returns seem to be tearing it down now.
Now, here’s where things get scary .Buckland observes that prior to 1960 US equities yielded twice as much as government bonds. At current treasury prices, that would imply an equity market yielding 6 per cent and…
the S&P would need to fall by another 40% to deliver that yield on the current dividend base.
In other words, the S&P would have to trade at around 500 points.
Of course, it seems likely that a further fall in the US equity market would be associated with lower treasury yields, but the point seems clear — a permanent return to the pre-1960s valuation relationship with bonds would have significant further implications for US equities.