In depth 

Are we in an equities ice age?

James Norrington

James Norrington

Little more than a week after Societe Generale's annual Global Strategy Conference, described as "Woodstock for bears" by guest speaker Russell Napier, equity markets tanked spectacularly. Last Wednesday, the FTSE 100 dipped into technical bear market territory, finishing 20.17 per cent down on its April 2015 peak. There has been something of a recovery in global stock markets since Mario Draghi made dovish signals on further quantitative easing (QE) by the European Central Bank (ECB) but, with shares having fallen so dramatically, one slide in particular from the SG event is worth considering further.

In the opening presentation, SG's Global Economic Strategist Albert Edwards highlighted the poor performance of stocks compared to government bonds since the late 1990s. For the exceptionally bearish Mr. Edwards, we are in the midst of an ice age for equities and he points to the pattern over nearly two decades of market gains, accumulated over multi-year spells, unravelling in just a few months.



Taking a UK-centric slant on the theme we can see that, since 2000, the total returns performance of the FTSE 350 has lagged significantly behind that of benchmark 10-year UK gilts (government bonds). Overall, the compound annual growth rate (CAGR) for an investment in gilts has been 6.2 per cent, compared with just 3.7 per cent for FTSE 350 shares. Any indexed view of bond returns does come with some large assumptions about reinvestment timings but one would certainly expect a premium for investing in shares.

Given that government debt is characterised as a 'risk-free' asset in modern portfolio theory, the risk-adjusted performance of equities has been atrocious. Does this mean that Mr. Edwards is right? Are 21st century investors caught in a great bear market? No-one can say for certain but if recent history is anything to go on, investors are certainly going to have to work smarter and harder to achieve satisfactory returns.


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