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  • Writer's pictureStar Magnolia Capital

Last 100 Years for the Next 100 Years

Credit Suisse’s Global Investment Returns Yearbook is full of insights for a long-term investors. We are often caught by the daily market movements and pay very little attention to the long-term perspectives. This Global Investment Returns Yearbook projects provides an analysis of investment returns stretching back 117 years, spanning all five asset categories in 23 countries across North America, Asia, Europe and Africa.

While we encourage you to read the report by yourself, the following is what we found particularly interesting.

1. Relative Sizes of World Stock Markets: 1899 vs. 2016

The world stock market was more balanced 116 years ago with UK, USA and Germany represented 53% of the world in aggregate. Today, USA alone represents 53%. In terms of the size of economies, China is about to overtake USA in the next 5-10 years, but China’s stock market is only 1/25 of USA… Since the 2008 financial crisis, the American stock markets performed very well, but you can easily see something is not “balanced” today.

2. Industry Weightings: 1900 vs. 2017

In 1900, USA and UK markets (15% and 25% of the world) were nothing but Rail. Today, Rail is essentially gone as a standalone sector. The only sector, which maintain the importance over the last 116, was Banks. Back in 1900, neither Technology or Healthcare, which together represent roughly 1/3 of USA stock markets today, was a standalone sector. This tells us how important to be open-mind about new sectors because the world is changing rapidly.

3. Don’t Be Too Yield-Hungry

The total return of US Equity since 1900 far exceeded US Bonds and Bills. In the long-term, you have to be an Equity investor to generate sufficient returns in order to combat against inflation (2.9% per year). In history, the low inflation, or deflation, is a rare phenomenon. And, even for Equity investors, it is important to reinvest dividends back because the difference over the long-term is too significant to ignore. The yield-hungry bond investors are destined to underperform in the long-term.

4. New Economy vs. Old Economy

If you had stayed within your comfort zone, i.e. old economies, for the last 116 years, you would highly likely have underperformed. The “frontiers” such as South Africa (3.3% of the world in 1899), Australia (5.2%) and New Zealand (very small) generated very attractive returns. The 1% difference in the annual return makes a 217% difference over the 116 years. Not always, but the risk/reward for investing in the frontiers is favorable as shown here.

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