It seems a long time ago now, but the FTSE All-Share returns index (with dividends reinvested) hit a new all-time high as recently as 31 October 2007. From then until early March 2009, world equity markets plummeted. Now investors need to know where they should position themselves to capture the greatest profits going forward. One pointer lies in the sectors that performed best after the UK's worst-ever bear market in 1973-74.
If the stock market low on 9 March 2009 marked the bottom of the 2007-09 bear market, this bear market will have registered as the third worst in UK history, according to Elroy Dimson, Paul Marsh, Jeremy Smithers and Mike Staunton of the London Business School (LBS).
The lost decade
The Yearbook shows that during the UK's worst bear market in 1973-74, equities fell by 73 per cent in real terms. At the depths of the 1970s bear market, the FT Ordinary Share Index (the headline index at the time) slumped to a price-earnings (PE) ratio of 3.8 and reached a dividend yield of 13.4 per cent. By comparison, the recent market low on 9 March 2009 saw a FTSE All-Share PE ratio of 7.4 and a dividend yield of 5.6 per cent.
After the depths of 1973-74, stock markets recovered strongly in 1975; the LBS research shows that the UK market enjoyed a total return (including dividends) of 146 per cent over the year. Inflation was running at 25 per cent a year at the time, so this was equivalent to a real return during 1975 of 97 per cent. Although an impressive recovery, the LBS researchers point out that this rally still left investors down by 42 per cent in real (purchasing power) terms.
In fact, the UK market did not regain its 1972 highs until February 1983 – recovery took over 10 years. As the LBS researchers put it: "Over the period of just over a decade from December 1972 until February 1983, investors achieved a real return from equities of zero."
Nowhere near as bad
In contrast to the 73 per cent peak-to-trough loss suffered in 1973-74, the peak-to-trough loss (to date) of the 2007-09 bear market has 'only' been 47 per cent, making this the UK's third-worst bear market. The second worst UK bear market ran from September 2000 to March 2003, in the wake of the bursting of the dot-com bubble, and witnessed a real total loss of 49 per cent.
