Triumph of the optimists?

As if to confirm this renewed nervousness, the gold price continued to rally towards its all time high of $1003 per ounce. And a report from the World Gold Council pointed out that investment demand for gold rose by 64 per cent in 2008 as investors sought a safe haven.

However, this week also saw the publication of Credit Suisse's 2009 Global Returns Yearbook, put together by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School. This trio were also responsible for the 2002 book The Triumph of the Optimists which analysed the long term returns on a wide variety of assets and detailed the extent to which equities outperform.

The 2009 Credit Suisse yearbook updates this work and adds some new analysis. Despite the savage bear market of the last 18 months, the authors believe that the long term prognosis for equities is good. The report says that over the last 109 years, the real value of UK equities (with income reinvested) has grown by a factor of 224, against 4.5 for bonds and 3.1 for risk-free Treasury Bills.

But there are clouds on the horizon. The authors conclude that the long term return on equities might not be as high in the future as it has been in the past. They say that the equity risk premium – the excess return over a risk free asset that investors expect to achieve in exchange for taking on equity risk – is likely to be between 3 per cent and 3.5 per cent in the future, which is below the long run 4.2 per cent premium. This, they argue, is partly because equity risk is more easily diversifiable than it used to be.

Nevertheless, they point out that investors can still expect to achieve far higher returns from equities than they can from cash. This is particularly important at a time when cash returns are close to zero and investors are seeking solace in other assets such as gold.