Asset returns, a ten-year view - The Monday Briefing


Earlier this year a reader suggested we look at how assets have performed over the last decade. We have taken the idea up and examined the gains and losses an investor would have made on a range of assets.

The last ten years have been a period of volatility and surprises, including Donald Trump’s election victory in 2016, Brexit, the pandemic, a deep recession, the energy crisis of 2022 and conflicts in Ukraine and Gaza. Since the pandemic investors have had to deal with the biggest inflation shock the West has seen in 40 years. That has had a significant effect on real asset returns.

The general price level in the UK and US is about 35% higher than ten years ago, with most of the increase occurring since 2022. In the euro area prices have risen by 26%. Just to preserve spending power US and European investors need to have made returns of about 30% in the last decade. (Given that investment income and capital gains outside, for instance, pensions, are taxed, the actual returns needed to preserve real, after-tax spending power would be even higher than 30%.)

If I had been told in March 2014 what lay ahead for economies and markets, I might have been inclined to put a fair amount of money into cash as a hedge against uncertainty. That would have been a bad decision. A UK investor who, ten years ago, opened a one-year fixed rate deposit account that rolled over, would have seen the real value of their cash decline by about 20%. Investors in the US and the euro area have also seen double-digit losses in real term.

In an inflationary period, when interest rates lag well behind inflation rates, cash is not king. The same applies to government bonds. US, UK and euro area government bonds gave decent returns in the era of low inflation and low rates up to the pandemic. The ensuing inflation wiped out all the earlier gains and more, leaving investors who have held government bonds for the last ten years nursing real-term losses.

Equities have offered some of the best protection against inflation and uncertainty in the last ten years.

The US is the star performer, where the overall equity index has tripled in value. Chinese equities did well until 2021, but since then have been hit by the impact of COVID-19 lockdowns and rising geopolitical concerns. Over the full ten-year period Chinese equities have returned just 18%. India seems to have taken up the mantle as one of the most attractive emerging economies. Indian equities have delivered four-fold returns since 2014.

Japan has been the other outperforming equity market of recent years. It has benefited from a weak yen, which has boosted earnings for exporters, low valuations and corporate governance reforms. Warren Buffett is one of the most high-profile foreign buyers of Japanese stocks, investing $6bn in Japan’s five major trading companies at what he described as “ridiculous prices” during the pandemic. Mr Buffett’s investments have paid off, with Japanese equities soaring since 2021. Over the last ten years they have returned 161%. Some might say it is about time too. In the previous quarter of a century, the period that followed the end of Japan’s long boom, the Japanese equity market almost halved in value.

UK and euro area equities have yielded about 65% over the last ten years. That is a decent real return, but a fraction of what US, Indian or Japanese markets have yielded.  

Technology has been the standout sector in most countries, far outperforming broad equity markets. Low interest rates and, more recently, lofty hopes for Gen AI, have supercharged performance. US tech stocks have risen almost five-fold since 2014, with greater gains for Meta, Apple, Amazon and Netflix. Dutch tech stocks, which include ASML, one of the world’s major makers of semiconductors, have risen seven-fold. But in tech, as for the wider equity market, China has bucked the trend. Since index data became available in July 2015 Chinese tech stocks have lost 78% of their value.

Construction and material stocks have also performed well in many countries as a result of infrastructure spending and growth in refurbishment and housebuilding. The Irish construction and material stocks sector has risen nine-fold in value on the back of a domestic housing boom.

Banks and real estate stocks have generally underperformed wider equity markets. Tougher regulation since the financial crisis has dampened risk taking by banks and added to their costs. Real estate has suffered from a combination of rising interest rates, the shift to hybrid working and increasingly stringent environmental standards. A ten-year investment in real estate stocks in the euro area or the UK would have delivered single-digit returns, leaving the investor worse off in real terms. The most spectacular decline has come in China, where, burdened by swathes of vacant properties and high levels of debt, real estate stocks have halved in value.

In many countries housing is one of the most widely held assets. House prices were buoyed up by low interest rates until 2022 since when they have proved fairly resilient in the face of interest rate rises and economic weakness. UK house prices have risen almost 60% in the last ten years and US prices are up by 95%. As well as (generally tax free) gains in the value of an owner-occupied property, owners pay no tax on the notional rental value of the property they live in, meaning that the true returns are even higher.  

Among alternative assets whisky has risen 322% and fine wine 149% outperforming global equities. The price of bitcoin has risen from $387 in 2014 to over $70,000 today, suffering wild gyrations along the way.

One of the paradoxes of the last decade is that in a time of uncertainty and volatility and, latterly, inflation, equities should have done so well. They are, after all, a relatively risky asset. Although equity markets have been driven by the soaring value of technology stocks many other, less glamorous equity sectors have seen reasonable, though smaller gains.

The pandemic was a great challenge, wiping almost one-third off the value of the global equity market in the span of February-March 2020. But once central banks slashed interest rates and governments pumped up spending equities took off again. Soaring inflation caused another setback in 2022, but since 2023, as inflation has fallen, broad equity markets have done well.

That has not applied for all sectors or all countries or all the time. Investors with limited exposure to the US market and to technology have lagged behind. There have been big ups and downs – and vice versa. Greek stocks lost 90% of their value in 2014 and 2015, and, although they have risen since then, are far below their 2009 peak. Chinese equities did well until early 2021, since when values have almost halved. Equity investing has offered plenty of opportunities for losing, as well as making, money.

Past performance offers lessons but few pointers to future performance. Since the start of this year equities have been rising, in part on hopes of rate cuts and growth to come. We must hope that this time equity markets are right.